2011第三季度全球基础油市场报告

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

impact the base oil market. Under pressure of weak demand, the market first experienced a standoff. Then prices started to weaken, followed by a continuous decline in late August.

By early September, Group I base oil export prices in the West quickly declined, dropping at least US$110-160 per metric ton (MT) from second quarter peaks. In the East, Group I base oil export prices also fell, but only by US$30-45/MT. These price movements were an indication that base oil markets were largely overvalued in Europe, Russia and the CIS. As key Asian buyers, such as China and India, struggled to work down their high inventories, the traditionally slow lubricant season began dampening trading possibilities.

Asian buyers built up downward pressure

Group I and II markets tightened because of heavy refinery turnarounds all over Europe and Asia during the first two quarters of the year. This situation led up to global base oil prices reaching record highs in May. In June and July, refineries started rebuilding their stocks. Meanwhile they held on to firm offers in the hope of a pick-up from Chinese and Indian buyers. This strategy did not pay off as economic growth started to slow down globally as well as in China and India, which resulted in lower lubricant sales. Therefore, most blenders started to reduce production rates in the summer. Many

small blenders even shut down their factories temporarily to avoid the risk of sudden price corrections. In India, the monsoon season hammered down the market further, while Chinese refiners cut domestic base oil prices in an attempt to bring down their inventory levels.

In the third quarter, the arbitrage windows between the West and the East were totally shut. Trading activity for Group I and II were muted in Chinese ports. Major Chinese traders had no interest in importing; they even offered Group I and II export cargoes to Southeast Asia. In September, offer

prices for solvent neutrals were between US$1,250 and US$1,320/MT FOB China. Group II N150 was offered at US$1,400/MT FOB China but this cargo attracted very little buying interest.

Base Oil Market 2011Q3 Review

To reduce inventories, Chinese oil giants Sinopec and PetroChina reduced operating rates at some plants. Some sudden turnarounds also reflected the weak demand and high inventory situation.

According to , by mid- September, base oil prices in Northeast Asia were

averaging US$1,280/MT for SN150, US$1,360/MT for SN500 and US$1,620/MT for Bright Stock on CFR basis, about US$35-40/MT lower than June prices.

In the Middle East, the market started falling as well. As the traditional takers of Iranian origin base oil, Indian buyers expected Iranian LVI base oil prices to be at FOB Iranian ports US$1,200-1,250/MT, which brings CFR India prices at around $1,240-1,290/MT. Actual deals were done within this range in September. Iranian Bright Stock was selling under FOB US$1,500/MT.

In the Middle East gulf, around 20,000MT of HVI Turkmenistan SN180 and SN350 were sold to Iran and Turkey in July and August. It was confirmed that prices were lower than US$1,000/MT on FOB Turkmenistan port basis. Many Group II and III cargoes were shipped into the Middle East gulf as well. In the third quarter, Group II N150 spot supply was offered at US$1,480-1,490/MT CFR UAE and Group III light grades at US$1,700/MT CFR UAE.

On July 31, a fire lead to the shutdown of Taiwan’s Formosa Petrochemical refinery in Miaoli, with a capacity of 500,000 MT/year. The plant restarted production five weeks later. The sudden outage of Formosa Group II products did not have a direct impact on the Asian base oil market due to weak demand coupled with high inventory levels.

In the third quarter, Asian Group II prices fell by US$50-70/MT over June prices. N150 and N500 were trading at US$1,370-1,410/MT and US$1,475-1,500/MT respectively on CFR China basis. In India, Group II CFR import prices were US$20/MT higher as local supplies were limited compared with China’s oversupplied situation. A major Indian producer, Hindustan Petroleum Corp. Ltd. (HPCL), is set to start new Group II production o 200,000 MT/year in the second half of September. Market

participants believe that the new production capacity will add downward pressure to the Asian Group II market.

European and Russian markets overvalued

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-

Base Oil Market 2011Q3 Review

130/MT lower. As expected, the obvious downward trend convinced buyers to wait for further price corrections. Weak demand and high inventories continued to add downward pressure on base oil

markets. Market participants believed that the base oil market would only rebound when the economic situation would improve.

Group III prices in Europe were increasing in the first half of the year and have become stable since July. Producers confirmed that deals were done at

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