Base Oil Market 2011Q3 Review

Standoff to falloff

A quarterly in-depth analysis of the global base oil market

By Jeroen Looye

The economic environment deteriorated rapidly in the third quarter. The economic slowdown in the early summer months were first considered to be nothing more than a soft patch and growth was expected to rebound strongly in the second half of the year. In the third quarter it become painfully clear that the slowdown as indeed global and are caused by both structural and cyclical factors that will probably not be resolves quickly. In developed economies high budget deficits and high

government debt levels restrict growth and cause panic on financial markets, further decreasing

consumer confidence and spending. While Japan and the US also have these problems, the situation I Europe is the most pressing since several countries are in real trouble and Greece is on the verge of a default. In developing economies, such as China, India and Brazil, policy makers are fighting inflation through measures which slow economic growth.

The slowdown in global economic has impacted crude oil markets and especially WTI prices. Brent and other benchmark crude prices have held up well considering the negative macroeconomic

environment. The main reason is that supply continues to me hindered by the Arab spring and the loss of production in countries such as Libya and Syria. Although Saudi Arabia has responded by raising production, the supply-demand dynamics point to a further tightening of crude oil markets, especially since non-OPEC supply continues to grow at a rapid pace.

In the third quarter, a slowdown of the global economy and weakening crude oil prices started to

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In July and August, strong demand from destinations such as West Africa, Latin America and the U.S. supported the European and Baltic Sea markets. The shutdown of two major U.S. refineries in July caused base oil shortages in those regions, although the arbitrage windows were apparently shut. Some July and August surplus cargoes from Spain and Italy were offered at US$30-40/MT premiums above published high end prices. Russian and CIS products were trading as high as US$1,400/MT on FOB Baltic basis in early July, a record high.

The Baltic Sea export price was strongly supported by Africa and Latin America until late July, when buyers started to hold off after crude oil prices dropped significantly. Soon after, Baltic Sea traders had to lower prices by US$40-50/MT to sell their products as stocks were starting to build up. By the end of July, deals were done in the Baltic Sea at around FOB US$1,330/MT for SN150 and FOB

US$1,335/MT for SN500. By late September, solvent neutrals were priced lower than US$1,200/MT on FOB basis. SN900 was offered at FOB US$1,320/MT and Bright Stock at FOB US$1,450/MT. At this point, arbitrage windows between the Baltic area and Asia or Latin America were finally open again.

Venezuela’s PDVSA offered a 30,000 MT base oil tender for September and October loading. A European trader won the tender and started to move cargoes from Europe and the Baltic Sea.

In Europe, refineries and blenders suffered from week-long standoffs due to the large gap between offer and bid prices. As buyers were determined to hold off, by the end of July several European

refineries started to ask lower premiums or even flat prices. Deals were done at about US$1,420/MT for SN150, US$1,460/MT for SN500 and US$1,610/MT for Bright Stock on FOB export North West Europe basis by late July. In late September, deals were done at around US$1,310/MT for SN150, US$1,330/MT for SN500 and US$1,490/MT for Bright Stock on FOB basis, which was US$110-