Arbitrage Pressures US Base Oils in First Quarter
HOUSTON (ICIS news)--US base oil players expect prices to fall further through the first quarter as weak demand and an open arbitrage window will put pressure on US producers to cut prices, market sources said on Thursday.
“Base oils are free-flowing through all the regions, and prices have nearly hit bottom in Asia and Europe,” a large buyer said, adding that “it’s still tremendously cheaper to get product from overseas and pay the shipping costs than get it in from a domestic supplier”.
Suppliers have begun to discuss lower prices as they would rather reduce prices and meet in the middle than lose business at a time when demand is at all-time lows, the buyer said.
Spot cargoes for 150 grades were last assessed at $1.89/gal FOB (free on board) US Gulf ($567/tonne, €442/tonne); according to global chemical market intelligence service ICIS pricing.
In Europe, 150 grade base oil was trading for $400-420/tonne FOB EUR and even lower out of Russia at $370-420/tonne FOB Baltic.
Despite cheaper prices abroad, some US buyers were considering whether to wait on the sidelines amid hopes that US prices will fall below imported material.
“I can buy a lot cheaper in Europe but there is the chance US prices will fall before the material arrives to my dock,” a buyer said. “I’d prefer to not buy, just wait it out for prices to fall further in the US”.
US sellers have been reducing posted prices for contract buyers, but there is still an additional 40-60 cents/gal to go, a buyer said.
Motiva reduced its Group II postings by 45-65 cents/gal on 2 February despite being in the middle of a 45-day turnaround.
Motiva is the largest Group II supplier in the US with a 40,300 bbl/day Port Arthur refinery in Texas.
Many other suppliers followed Motiva this week by lowering values by up to 65 cents/gal in a struggle to maintain competitive market share, buyers said.
ExxonMobil told its buyers it would lower its posted prices by 20-65 cents/gal effective on 4 February. Sunoco also lowered its prices by 20-65 cents/gal.
In the Group II sector, both ConocoPhillips and Flint Hills lowered posted prices. Flint Hills lowered contract prices by 50 cents/gal effective on 2 February. And effective on 4 February, ConocoPhillips lowered its Group II posted prices by 55-60 cents/gal depending on grade.
Posted base oil prices have been on a steady decline due to weak demand and crude hovering at $40/bbl. Sellers have announced two or more decreases in 2009 thus far.
ExxonMobil’s 150 grade, now at $2.37/gal has dropped more than 30% since it was $3.42/gal at the start of the year.
Still, buyers are under the impression there is still room to drop another 30-60 cents/gal. Five years ago this month, when crude was also hovering at $40/bbl, the price of SN150 was $1.51/gal.
Even with consistent price drops, sellers remained concerned about demand.
“It would be nice if dropping prices would bring the customers back to pick up this volume we are sitting on, but it’s just not happening yet,” a supplier said.
Players anticipate demand will pick up by the end of first quarter, but many are concerned it will not, and if so that could lead to another base oil closure, a supplier said.
“We are experiencing deflation in the base oils arena,” the supplier said. “In deflation, there is limited demand regardless of price offerings. This is probably going to continue until the spring blending season begins around March or April.”
“If demand does not return, a lot of refiners are going to be faced with the decision [whether] to stay in the base oils business,” the supplier added.
Although base oil prices are facing difficult conditions, the market saw a similar situation at the beginning of 2008.
In early 2008, margins were negative for many producers amid weak demand. Suppliers chose to divert feedstocks to refined products, which were more profitable but eventually led to tight supplies when Marathon and Citgo announced they were exiting the base oils business.
“Base oils are free-flowing through all the regions, and prices have nearly hit bottom in Asia and Europe,” a large buyer said, adding that “it’s still tremendously cheaper to get product from overseas and pay the shipping costs than get it in from a domestic supplier”.
Suppliers have begun to discuss lower prices as they would rather reduce prices and meet in the middle than lose business at a time when demand is at all-time lows, the buyer said.
Spot cargoes for 150 grades were last assessed at $1.89/gal FOB (free on board) US Gulf ($567/tonne, €442/tonne); according to global chemical market intelligence service ICIS pricing.
In Europe, 150 grade base oil was trading for $400-420/tonne FOB EUR and even lower out of Russia at $370-420/tonne FOB Baltic.
Despite cheaper prices abroad, some US buyers were considering whether to wait on the sidelines amid hopes that US prices will fall below imported material.
“I can buy a lot cheaper in Europe but there is the chance US prices will fall before the material arrives to my dock,” a buyer said. “I’d prefer to not buy, just wait it out for prices to fall further in the US”.
US sellers have been reducing posted prices for contract buyers, but there is still an additional 40-60 cents/gal to go, a buyer said.
Motiva reduced its Group II postings by 45-65 cents/gal on 2 February despite being in the middle of a 45-day turnaround.
Motiva is the largest Group II supplier in the US with a 40,300 bbl/day Port Arthur refinery in Texas.
Many other suppliers followed Motiva this week by lowering values by up to 65 cents/gal in a struggle to maintain competitive market share, buyers said.
ExxonMobil told its buyers it would lower its posted prices by 20-65 cents/gal effective on 4 February. Sunoco also lowered its prices by 20-65 cents/gal.
In the Group II sector, both ConocoPhillips and Flint Hills lowered posted prices. Flint Hills lowered contract prices by 50 cents/gal effective on 2 February. And effective on 4 February, ConocoPhillips lowered its Group II posted prices by 55-60 cents/gal depending on grade.
Posted base oil prices have been on a steady decline due to weak demand and crude hovering at $40/bbl. Sellers have announced two or more decreases in 2009 thus far.
ExxonMobil’s 150 grade, now at $2.37/gal has dropped more than 30% since it was $3.42/gal at the start of the year.
Still, buyers are under the impression there is still room to drop another 30-60 cents/gal. Five years ago this month, when crude was also hovering at $40/bbl, the price of SN150 was $1.51/gal.
Even with consistent price drops, sellers remained concerned about demand.
“It would be nice if dropping prices would bring the customers back to pick up this volume we are sitting on, but it’s just not happening yet,” a supplier said.
Players anticipate demand will pick up by the end of first quarter, but many are concerned it will not, and if so that could lead to another base oil closure, a supplier said.
“We are experiencing deflation in the base oils arena,” the supplier said. “In deflation, there is limited demand regardless of price offerings. This is probably going to continue until the spring blending season begins around March or April.”
“If demand does not return, a lot of refiners are going to be faced with the decision [whether] to stay in the base oils business,” the supplier added.
Although base oil prices are facing difficult conditions, the market saw a similar situation at the beginning of 2008.
In early 2008, margins were negative for many producers amid weak demand. Suppliers chose to divert feedstocks to refined products, which were more profitable but eventually led to tight supplies when Marathon and Citgo announced they were exiting the base oils business.
“Then the busy season began and we hit the most insane roller coaster ever with prices surging to record highs and tight supply across the globe,” a buyer said.
source: www.ICIS.com
