Focus story by Jasmine Khoo and Veena Pathare
SINGAPORE (ICIS)--Asia Group I base oil may head to markets traditionally dominated by the Middle Eastern producers as price gap between the two regions narrows thus opening up a rare arbitrage opportunity, market sources said on Wednesday.
Rising prices of spot Group I base oil prices in the Middle East and falling Group I Asian offers has narrowed the price gap between Group I base oils in Asia and the Middle East since June this year, market sources said.
A negative price gap between prices of Asian and Middle Eastern cargoes since June this year, is likely to open up the arbitrage for spot Group I Asian cargoes into markets such as the UAE (United Arab Emirates) and India in the near-term if the downtrend in Asian Group I prices continues, market sources added.
SN500 prices in the Middle East were at $1,050-1,065/tonne CFR UAE in the week ended 14 August, up $10/tonne at the low end from the previous week, ICIS data showed.
Group I SN500 spot prices in Asia have recorded a downtrend for the last five months, declining from an average at $1,040/tonne FOB Asia on 28 March 2014 and were assessed at $1,010-1,025/tonne FOB Asia on 15 August, also according to ICIS data.
The price spread between Asian and Middle Eastern Group I SN500 cargoes have fluctuated from a high of $130/tonne to a low of $15/tonne between August 2013 and June this year, leading to a lack of trade of Asian cargoes into India and UAE.
However, since June, this spread has become negative owing to higher-priced Middle Eastern cargoes.
Asian prices of Group I base oils that have largely remained at well over $1,000/tonne FOB (free on board) Asia since August 2013 have come under increasing pressure in the recent weeks, following ample supply and weak demand.
Rising supply of Group II cargoes with an increase in substitution from Group I to Group II formulations has further fuelled a decline in Group I prices across Asia.
Asian prices typically represent cargoes with a viscosity index (VI) of 95 or more, and have traditionally commanded a premium over their Middle Eastern counterparts whose VIs range at 88-92.
Most Asian producers maintained higher offer prices for much of the last one year, as they achieved a better netback in selling to markets in northeast and southeast Asia and did not focus on regions such as India and UAE, where they would have to compete with the lower-priced Middle Eastern cargoes actively traded in the spot markets.
However, Asian Group I SN500 base oil prices have been mostly on a decline since April this year, owing to ample supply and rising pressure from northeast Asian-origin Group II 500N cargoes.
On the other hand, India and the UAE are two key regions which have mostly refrained from importing spot cargoes from Asia owing to high export offers, and have sourced traditionally from the Middle East.
Importers in these markets have had access to the lower-priced Middle Eastern cargoes, as the sanctions imposed on the Middle Eastern exporters has greatly limited the number of buyer markets for the latter.
Market participants continue to hold a largely bearish outlook for Group I base oil prices in Asia also because of weaker Group II prices.
Some Asia-based buyers were also heard saying that they will focus more on buying domestic material instead of import cargoes, because of ready availability and uncertainty clouding the near term price outlook.
In contrast to this, supply from the Middle East to India and UAE has been largely curtailed since May 2014 owing to limited availability.
Prices in the Middle East rose as producers in the region who traditionally offered to Indian and UAE-based importers saw a better netback in exporting to markets such as Iraq, following its political crisis that affected many production sites there.
A Middle Eastern producer, who offered 20,000 tonnes of Group I SN500 for export via tender in the previous weeks, sold the cargo to a UAE-based importer at an increase of $5-15/tonne from its previous deal price.
This led to a rise in Group I base oil prices in the UAE import markets in the recent weeks. as importers had limited choice but to purchase at higher prices.
“If the downtrend in Asian Group I base oil prices continues, we could see Asian cargoes making their way to UAE, as UAE continues to remain a dominant buyer of the Group I grade of base oils,” a Asian/Middle Eastern base oils trader said.
Declining Group II prices would also mean that an increasing number of blenders would prefer to switch to using Group II base oils in their formulations, given the latter’s superior properties.
The Indian market has already started seeing an increased inflow of Group II cargoes from Asia as well as the US at prices comparable to Group I Middle Eastern cargoes.
Some market players said they believed this competition from Group II is only going to intensify in the near-term, as new starts ups in northeast Asia and the US resort to aggressive pricing strategies in selling their cargoes.
Additional reporting by Veena Pathare
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