Middle East base oils likely to remain depressed through H2 2019

Author: Izham Ahmad


SINGAPORE (ICIS)--The Middle East base oils market has experienced a depressing first half of 2019 with more pessimism expected in the second half as geopolitical tensions continue to simmer, threatening trade flows in the region.

(Source: Wallace Woon/EPA/REX/Shutterstock)

Part of the jittery environment in early 2018 was blamed on renewed US economic sanctions against the region’s key Group I producer Iran, as well as the deteriorating trade relations between the US and China.

In May, tensions ratcheted up further when the US announced it was not renewing waivers on sanctions against Iran. The waivers had been granted to eight major buyers last November for six months after the US pulled out of a nuclear deal and re-imposed economic sanctions against Iran.

Although there have been no indications these developments have had any direct impact on the base oils market, they have created more uncertainty for producers there, especially those which rely heavily on export markets.

In April, some sources mentioned at least two vessels carrying Iranian base oils were due to discharge their cargo in the UAE within the next few weeks. But this could not be confirmed with the Iranian supplier.

“Not sure if this will continue once the sanctions waivers are withdrawn,” said one Middle Eastern source.

Additionally, the Muslim fasting month of Ramadan took place through May and market activity slowed further during this period.

Also in May, the US-China trade war re-ignited when the US accused China of backtracking on the trade deal, which calls for legislative commitments from the northeast Asian giant.

The US hiked to 25% tariffs on $200bn worth of Chinese goods on 10 May, with China responding with its own trade-hindering measure effective 1 June.

In the Middle East market, Group I base oils prices traded on a softer note through most of the first six months of the year but in a fairly tight range.

Since the end of 2018, SN500 prices in Iran have edged lower from around $605/tonne FOB (free on board ) Iran while SN150 prices have also retreated from around $610/tonne FOB Iran to $565/tonne FOB Iran.

After the Eid el-Fitr holidays, SN500 prices were hovering near their lows of the last six months, at around $560/tonne FOB Iran around mid-June, while SN150 prices were also near the lows.

On the supply side, market players in the UAE were also saying there was sufficient cargoes having built up over recent months and as such there was less demand for further spot deals in Group I, particularly with the threat of renewed sanctions against Iran.

Group I buyers in the UAE said there was still sufficient supply of material available in the local market and as such any upside potential for Iranian material was limited.

Additionally, tighter restrictions on the shipment of Iranian cargoes to countries in the Middle East have caused difficulties in securing vessels to move the cargoes and significant delays in delivery and payments for refiners. That also caused some buyers to source Group I material from other regions.

Looking ahead to the second half of the year, base oils supply from Iran is expected to be sufficient but tighter restrictions could still crimp demand and delay shipments.

The threat of open conflict had also increased after reports of an attack on two tankers carrying naphtha and methanol from Qatar and Saudi Arabia to Asia on 14 June.

Up to 40% of global seaborne crude passes through this narrow region, according to ICIS analyst Ajay Parmar. Others put the minimum at about 25%. The Strait of Hormuz is controlled by Iran but is used by Saudi Arabia, Iraq and the UAE to export their crude.

The strait separates the Middle Eastern major crude oil producers from the global oil market.

The US insists that Iran is the entity behind the attacks. However, Iran has strongly denied these allegations.

The US-China trade war also has shown no signs of abating any time soon.

All these combined suggest Group I base oils demand in the Middle East region is expected to remain depressed through the rest of 2019.

ICIS Editorial Chart goes hereMIDDLE EAST GROUP II

While Group I base oils continues to hold the biggest share of the world base oils market, its use in general, is shrinking across most regions with the exception of the Middle East and Africa.

Group II usage has been slowly increasing albeit at a pace that remains generally slow.

The increased acceptance of Group II or even Group III base oils has also seen increased supply and stiffer price competition particularly with the rise of Middle Eastern refiners.

But the Middle East region is not the key battleground for Group II market share given the relatively smaller size of the market there.

Northeast Asian refiners have been dominant suppliers of Group II and III base oils to markets such as India.

The main Group II and III producers in Saudi Arabia, Qatar, Bahrain and UAE have also focused their attention on markets outside of the Middle East due to better demand and higher margins.

In the UAE however, Group II prices have been in a fairly narrow range since the start of the year.

Group II 500N prices started the year near their lows around $665/tonne CFR (cost & freight) UAE and gained to $720/tonne CFR UAE in early-May. Similarly 150N prices also were near their lows in January before recovering to $705/tonne CFR UAE by end of the H1.

Those gains of H1 ran out of steam as buyers pushed back against the higher offers from mostly Asian suppliers.

Into the second half of the year Group II pricing is expected to remain rangebound amid generally stable supply-demand conditions. Stiff pricing competition meant it was unlikely that suppliers could push through further price hikes.

Many buyers still indicated having sufficient levels of inventories to support their requirements for the time being.

On the flip side, sellers were believed to not be facing any pressure to move cargoes quickly and as such were willing to sit on the offers and wait for buying sentiment to improve, the sources added.

ICIS Editorial Chart goes here

Focus article by Izham Ahmad

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