LONDON (ICIS)--How prices in the European domestic Group I base oil market develop in July remains unclear, with firming pressure from higher feedstock costs and a weaker euro being at odds with other market factors, sources said on Tuesday.
The conflict in Iraq has pushed crude oil prices, and subsequently those of vacuum gas oil (VGO), higher in recent weeks, which is squeezing production margins and leading to refiners considering raising base oil prices.
Putting further strain on production economics is the slightly weaker euro versus the dollar, for which refiners would like to compensate by increasing euro prices.
However, the market is balanced, with one refiner even saying it is beginning to lengthen, and demand is expected to slow down as we go into the summer months.
According to a refiner, July typically sees slower consumption from the Benelux region, while in August demand is reduced from more southern countries such as France, Italy and Spain.
This refiner, based in northwest Europe, said that despite the higher feedstock prices, it feels the current market condition and the fact that we are entering the summer slow season means that prices will likely be rolled over for July.
It added that base oil price increases earlier in the year had improved margins, giving some room to accommodate higher feedstock prices.
However, another northwest European refiner said it hopes to successfully raise its base oil prices as a direct result of higher VGO costs, although it planned to do this only from mid-July. This refiner said it would reduce its production rates if it’s demand suffered as a result of the move.
A southern European refiner also said it hopes to adjust prices higher in July, although this was because of the exchange rate as opposed to feedstock costs.
A buyer said that it had been expecting to see lower prices before the conflict in Iraq broke out and crude oil prices rose. It said its suppliers appear to be waiting to see how the situation develops before announcing any price moves.