Viewpoint: FSU base oils hold in narrow range

Prices in the Baltic market initially got support from unusually strong demand at a time of year when buying interest is typically weaker during the winter months.

The firm buying interest helped to soak up a wave of supplies from Russian producers in late 2017 and early 2018 and triggered a steady rise in prices from January. Prices have typically fallen in January because of seasonally slow demand and ample availability.

Buyers build stocks early

Buyers began locking in these supplies much earlier than usual from the fourth quarter of 2017, in anticipation of tighter availability and higher prices caused by a heavy round of plant maintenance in Russia starting from February.

Russian base oil exports to Baltic ports rose to 219,770t in the five months to February 2018, up from 154,000t during the same period a year earlier and reflecting the pick-up in buying interest.

The rise in supplies far outpaced base oil exports of 174,900t from Baltic ports in the five months to February 2018.

The disparity reflected buyers' moves to hold on to a large portion of these supplies with the aim of covering term requirements and benefiting from any rise in prices over the following months.

Supplies avoid 2017 tightness

The move to secure these volumes early came after the European market faced unexpectedly tight supplies and a surge in prices in first-half 2017 because of a heavy and prolonged round of plant maintenance. Fob Baltic base oil prices had then got a boost from the tightness in the European market as buyers in markets like Africa sought more Russian base oils instead. Buyers sought to take advantage of a repeat of this trend in first-half 2018.

But the trend was weaker this time round, partly because of the earlier stockbuild.

The start of maintenance involving several major Russian base oil units began from February and continued to early May. The shutdowns triggered a drop in exports, as expected. Russian base oil exports to Baltic ports bottomed out in April at a two-year low of around 17,000t. This was down from typical volumes of around 40,000 t/month to this region over the previous year.

Fob Baltic cargo base oil prices rose steadily during this period, as expected. But the $50-60/t rise in SN 150 and SN 500 prices between January and April was smaller and shorter lasting than usual. Fob Baltic cargo prices the previous year had risen steadily to August, with SN 150 climbing by some $120-130/t and SN 500 by almost $200/t.

The more muted price rise reflected the market's better ability to meet requirements during the plant maintenance season. This in turn partly reflected buyers' stockbuild ahead of the shutdowns.

Europe faces lighter maintenance

Supplies in Europe were also more readily available than in 2017 because of a lighter round of plant maintenance. Most of the maintenance in 2018 was also over by May. With supplies rising, lower European export prices cut their premium to fob Baltic prices to less than $50/t by June. This premium in 2017 was still at more than $100/t in June, only falling below $50/t late in the fourth quarter of the year.

Fob Baltic cargo prices began to fall from May following the completion of the plant maintenance work in Russia. But the pace of the price drop was relatively slow, especially for light grades. These fell by just $30/t between April and the end of the third quarter.

Prices got support from unexpectedly limited availability. The tight supplies reflected extended maintenance at Naftan's Group I plant in Belarus from the end of June to the fourth quarter. Its supplies of SN 150 remained unavailable until November. Demand from Russia's domestic market, as well as regional markets like Ukraine, was also unusually firm.

Demand rises for light grades

The steady rise in crude and diesel prices added further support, especially from September, when feedstock prices moved increasingly close to fob Baltic cargo prices. Tight diesel availability in Russia then added to buyers' incentive to secure light-grade supplies for use as a fuel extender with diesel.

Spot availability from several Russian producers improved markedly from September. But rising feedstock costs, and the firm regional demand for light grades, cushioned the drop in outright cargo prices. But the inability of these base oil prices to rise slashed further their premium to diesel and vacuum gasoil prices.

While outright prices remained under pressure during the fourth quarter, the slump in crude prices eased pressure on base oil margins.

Heavy-grade prices fell because of oversupply and weak demand. Light-grade prices held firm because of strong demand in the region and in Russia. Some domestic buyers sought additional supplies ahead of a fall in Russia's export tax from the start of 2019. The move was expected to boost refiners' interest in boosting export volumes.

The effect was the disappearance of a price spread between fob Baltic light and heavy grade prices. The heavy-grade premium to light grades had been more than $50/t in the third quarter.

Black Sea supplies fall

Prices in the Black Sea market also held in a relatively narrow range throughout the year. Spot activity was muted as the slowdown in Russian base oil shipments to the region continued to slow. Russian base oil exports of 156,000t to Black Sea ports during January-November were down from more than 200,000t during the same period in 2017.

Most of the supplies that did move from Black Sea ports were to cover term commitments in markets like the Mideast Gulf and southeast Asia. This in turn slashed the volume of shipments to Turkey, which had previously been a key outlet for these supplies.

Turkey, Mideast Gulf demand slows

Turkish demand anyway slumped from mid-year following the steep depreciation of the country's currency versus the US dollar.

But spot demand also faced pressure in other markets like Mideast Gulf, which became a key outlet for surplus Group I and Group II supplies from Asia-Pacific during the second half of the year. Lower demand and prices in these markets kept downwards pressure on fob Black Sea prices during the third quarter.

A repercussion of the imposition of US sanctions on Iran in November was a pick-up in demand in the Mideast Gulf for Group I supplies in place of cargoes from Iran. This helped to support buying interest and prices for Russian base oils during the last two months of the year. But there was more interest in lining up these shipments from the Baltic region rather than the Black Sea market.

While spot cargo activity slowed from Black Sea ports, there was a steady pick-up in flexibag shipments from the region throughout the year.