Mideast Gulf base oils face fewer arb opportunities

Mideast Gulf base oil prices are to start 2020 with the prospect of fewer arbitrage cargo opportunities than in early 2019.

Mideast Gulf base oil prices fell in 2019 amid weaker demand and pressure from arbitrage shipments from Europe, the US and Asia-Pacific.

Mideast Gulf base oil prices fell in the first half of last year, extending a sustained price drop that began in the second quarter of 2018. Prices were steadier in the second half of 2019.

Prices fell in 2018 in response to the persistent availability of Group I supplies from southeast Asia and Japan. These cargoes supplemented steady flows from Iran. The addition of Group II shipments from Asia-Pacific and the US at the start of 2019 added to the regional supplies. Price levels for these supplies were unusually competitive versus Group I base oils.

The availability of Group I supplies from Asia-Pacific slowed from late 2018 in response to tighter supplies caused by refinery run cuts in Japan. Producers in this market then built stocks in early 2019 ahead of a heavy round of plant maintenance starting in the second quarter of the year. The move curbed their availability of spot volumes.

European supplies move to Mideast Gulf

Mideast Gulf buyers turned instead to an increasingly steady flow of Group I supplies from producers in Europe. Sliding prices in this market opened the arbitrage to move European cargoes to the Mideast Gulf. This arbitrage had been shut throughout most of 2018 because European Group I export prices had been too high. The high prices and closed arbitrages exacerbated the supply overhang that European producers had faced at the start of 2019.

To move shipments to the Mideast Gulf, European cargo prices had to fall even more sharply than regional prices that were already sliding. They also had to compete with Group I supplies from within the region. These volumes were also available at increasingly competitive price levels.

The supplies included shipments from Iran. The availability of these supplies in turn dampened interest in cargoes of Russian origin from the Black Sea market because their prices were deemed to be too high. The weaker demand exacerbated the overhang of Russian Group I supplies in this market.

Group I prices had in previous years firmed from the end of the first quarter of the year in response to a drop in supplies of Iranian origin during the country's new year festivals from late March. In 2019 the fall in prices paused during this period. But there was no price recovery.

The plentiful availability exacerbated the demand weakness by curbing buyers' urgency to build larger stocks. They were comfortable to secure additional volumes more on a need-to basis. The drop in crude prices in May added to that preference in a bid to limit exposure to lower prices.

Demand for Group II base oils slowed during the second quarter of the year. Tighter availability and a surge in prices closed the arbitrage from the US. Asia-Pacific producers moved more supplies to China and India at slightly firmer prices. The trend highlighted the sporadic availability of these supplies in the Mideast Gulf market and supported regional blenders' continuing preference for Group I base oils.

Group II arbitrage reopens

But this arbitrage to move Group II base oils to the region reopened late in the second quarter of the year. A sustained drop in Chinese demand left Asia-Pacific producers with a growing surplus and falling prices. These lower prices made the arbitrage more feasible again and more competitive versus Group I supplies.

Group III base oil prices held in a narrow range in the first half of the year. The region absorbed a large volume of supplies that were available at unusually competitive prices on an ex-tank basis, especially compared with Group III cargo prices. Some buyers purchased these supplies in place of Group II base oils.

A producer also had a larger than expected volume of surplus cargoes during the first five months of the year. A large portion of these shipments moved to India.

Asia-Pacific producers targeted the Mideast Gulf market with more Group II supplies in the third quarter of the year. Weaker Chinese demand left them with persistent surplus supplies that they redirected towards this region.

Tensions increase freight costs

But higher freight costs complicated some of these arbitrage opportunities. Some vessel operators added a war risk premium to their freight costs in response to several incidents in the region that raised geopolitical tensions.

Steadier European Group I prices also kept shut the arbitrage from this region throughout the third and fourth quarters of the year.

Buyers responded by securing more supplies from within the Mideast Gulf. These were readily available and priced at competitive levels. Slow finished lube demand throughout the region and in east Africa curbed further their need for arbitrage volumes.

Buyers secured arbitrage supplies of Group II base oils from the US in the fourth quarter of the year, after producers in this market slashed their prices to clear a large surplus.

These competing supplies prompted some Asia-Pacific producers to trim their price offers in response. But other producers were comfortable to maintain their price offers in response to a more manageable surplus. The result was a slowdown in arbitrage shipments from Asia-Pacific to the Mideast Gulf in the fourth quarter of the year.

Group III ex-tank and cargo prices fell in the third quarter as the region struggled with oversupply. There was a sustained slowdown in shipments to China, and an increasingly competitive Group III market in Europe. There had been a lack of shipments to India for several months.

Lower prices then triggered a wave of shipments to India and China, clearing the surplus. Group III price offers then rose during the last couple of months of 2019.

By Iain Pocock