Europe base oils players eye Saudi attack, monitor impact on margins

LONDON (ICIS)–Europe’s base oils markets were slow to respond to the crude oil spike induced by an attack on Saudi Arabia’s Abqaiq crude oil processing plant.

Players were monitoring the situation closely to see whether the surge in crude oil prices would sustain and thereafter re-evaluate their positions accordingly.

When the incident initially occurred, refiners pulled their base oil offers from the market. Players expect to be re-quoted in the coming days though, as the picture clears.

According to ICIS analysis, the plant could take up to four weeks to repair, with key pieces of equipment damaged in the multiple processing chains of the facility.

Prices across Europe’s domestic and export markets as well as the Baltics  were unmoved by the swift spike in crude values following the Saudi strike.

Domestic base oils, VGO, crude $/tonne

Players are watching to see whether the price stays firm for a long period, impacting margins and refineries’ decisions about production. For now, the impact on production is unclear.

SUPPLY, DEMAND OVERRULE UPSTREAM
In 2019 particularly, Group I base oils values have been frequently led by supply and demand, with upstream prices changes often dampened or delayed.

This is linked to healthy Group I supply from Europe and Russian refiners, combined with weak Group I demand.

One clear example of this, is that a force majeure on base oils supply in late summer at a French refinery – which was unable to load Group I material due to strikes – had little effect on pricing.

It has been a year of strong pressure on margins for Group I refineries in Europe. Low Group I prices were – for the refiners, maddeningly – stable in the face of firm vacuum gasoil (VGO) prices.

FOB Europe export price vs VGO, $/tonne

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Any opportunity to change the narrative is likely to appeal to refiners, however a number of them concede prices have not moved in the first week after the Saudi attack. Trader feedback also pointed to a weaker trend in some price offers in the Baltic Sea at the start of the week.

One refinery source said: “It’s not affected straight away, the [base oil] price doesn’t move with crude oil. Of course [if you] pay much more on crude oil, it will have effect on the… margin.”

Another said the market is not liquid enough to stop selling based on the news of the strike, adding that in any case, “The base oil market takes some time reflect these things.”

A third producer said: “The price level for base oils will depend on whether [the VGO price peak is] sustained.”

In the week to 17 September, Group I SN150 prices for domestic and export remained at $650-710/tonne FOB (free on board) NWE (northwest Europe) and $590-635/tonne FOB Europe Export respectively. The Russian export market range was at $475-525/tonne on a FOB Baltic basis.

END OF TURNAROUNDS, BALTICS AGRICULTURAL SEASON 
Looking ahead, other factors may also play a significant, potentially more influential role for Europe’s base oils sector, including a boost to supply from Russia and France.

Scheduled maintenance at Russian refiner Naftan means offers for September are restricted to SN150. Supply is expected to resume in late October or November, which would boost availability.

Resumption of supply from Total’s France refinery is also on the cards, which could feed into the domestic market.

On top of that, in the west African market, which is often served by European and Russian refiners, traders have seen prices pressured by strong competition.

This has so far helped to cap European and Baltics export pricing, and exporters will be monitoring how much flows out of Europe and Russia to see if this is a release valve or continues to stopper material in the Med.

Pictured: Workers refuel the tank at a Jiddah, Saudi Arabia gas station on this week; global energy prices spiked following the attacks at Aramco’s processing facilities
Picture source: Amr Nabil/AP/Shutterstock

Focus article by Sarah Trinder and Vicky Ellis

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