The Middle East situation is gathering intensity as each day passes without signs of aggressive activity from either Iran or any of its proxies. Some predict Hezbollah in Lebanon will cast the first stone, perhaps followed up by a large-scale strike directly from Iran. Israeli defenses are as prepared as they can be, with Allied powers standing by in the wings should the situation escalate.

Western leaders have urged Iran, through its new president, Mazoud Pezeshkian, to avoid any direct confrontation or attack on Israel, although Iran has avowed revenge for the assignation of Ismail Haniyeh in Tehran last month, with reports of missile and drone units being prepared for a direct attack on Israel.

The situation does not augur well for commercial activity in the Middle East regions, particularly in the Eastern Mediterranean and the Middle East Gulf, which of course includes base oil trades that necessarily need to continue. Finished lube blenders are expressing concerns regarding supplies of basic materials to continue their operations.

Many distributors have moved to importing finished lubricants rather than relying on local production that depends on supply chains for base oils, additives and packaging.

In the Russia-Ukraine conflict, Kyiv has seized an initiative by invading Russian territory in Kursk and Berdyansk. These are not Ukrainian territories under Kremlin control, but are parts of the Russian Federation. This unprecedented action has taken Putin by surprise, and is causing economic, political and social friction within the Russian government and armed forces.

Crude oil has built on the lower prices of one week ago to recover to levels above $80 in the case of dated deliveries of Brent crude.

dated deliveries of Brent crude posts at $80.15 per barrel, for October front month settlement, around $4 higher than last week. West Texas Intermediate has performed more positively, reaching a level of $77.50/bbl, still for September front month. 

Low-sulfur gasoil prices firmed, reporting at $720 per metric ton, still for August front month. All of these prices were obtained from London ICE trading late Aug. 12.

Europe

An export market remains a remote possibility for European API Group I base oils with more import cargoes being considered from Red Sea and United States sources. Some traders are looking at the Nigerian market but are keeping options open to take the cargo into Europe should there be ongoing problems for finance and payments from receivers in Lagos.

European Group I supplies remain balanced, with prices stable, but with the holiday season in full flow, demand has dwindled during the past couple of weeks and will not return until the end of August.

European markets are also dull, with very little activity other than routine deliveries and loads that had been prearranged before the start of August. Supplies of bright stock are extremely limited, though, and a number of producers have raised prices for this grade to levels not seen for some years. Two Spanish refiners have issued new prices for bright stock in excess of $1,400/t.

Group I prices rose this week, although with the market remaining quiet, it is not possible to assess reactions to price hikes. Some remaining participants in the base oil market have suggested that sellers are merely protecting their market positions during August, and may revert to lower, or discounted levels, come September.

Margins are rising as the premium to distillates is at its highest level in years. This pricing position could incentivize refiners to ramp up production at the start of September. Prices are now between €1,085/t-€1,165/t for solvent neutral 150, €1,190/t-€1,225/t for SN500 and at €1,420/t-€1,475/t for bright stock, all on an FCA basis.

The dollar exchange rate to the euro remains flat, posting at $1.09214 Monday. The average price differential across all grades, between Group I sales within the region and notional export sales is unchanged at €10/t-€25/t, with prices almost in line.

June and July saw a large increase in the quantities of Group II base oils arriving into Europe from U.S. producers. Now European stocks are riding at high levels, and sellers are anticipating rising demand going forward in to the fourth quarter. There are currently a number of buying inquiries for September and October being circulated in the market, but these may not actually come to actual sales until buyers return from vacation. Sellers are taking stock of the supply-demand picture during August to try to assess new demand and clues about the direction of prices in early September.

Group I prices have now come very close to Group II levels, creating some upward pressure on the latter. At the same time, European Group II prices remain relatively high in comparison to other regions, such as Asia-Pacific and Central and South America. The premiums to vacuum gasoil and diesel have improved significantly.

Group II prices are unchanged the past week at €1,160/t-€1,185/t ($1,270/t-$1,295/t) for 110 neutral and 150N, €1,220/t-€1,245/t ($1,330/t-$1,360/t) for 220N and €1,295/t-€1,320/t ($1,415/t-$1,445/t) for 600N. These prices apply to a wide range of Group II base oils from European, U.S., Red Sea and Asia-Pacific sources, all imported in bulk.

Group III markets around Europe are calm with little activity to drive demand. The overall market continues to experience price erosion. More replenishment cargoes are due to be placed into the European market over coming weeks, with material arriving from Middle East Gulf and Asian sources.

Whether prices will be further affected by increased supply remains an unknown, but if large swathes of Group III grades start to crowd the European scene, prices may come under renewed downward pressure. Further decreases could bring Group III oils close to Group II levels.

European numbers for Group III oils with partial slates of finished lubricant approvals are unchanged at €1,170/t-€1,240/t for 4 and 6 centiStoke grades and €1,165/t-€1,250/t for 8 cSt, all on an FCA basis ex Antwerp-Rotterdam-Amsterdam or Northwestern Europe. Prices for rerefined Group III are also unchanged at €1,155/t-€1,185/t for 4 and 6 cSt, on an FCA basis ex rerefinery in Germany.

Prices for Group III oils with full slates of approvals remain at €1,785/t-€1,820/t for 4 and 6 cSt and €1,825/t-€1,835/t for 8 cSt, all on an FCA basis ex hubs in Antwerp-Rotterdam-Amsterdam, Northwestern Europe and Spain.

Baltic & Black Seas

No Baltic cargoes have been seen or reported out of the ports of St Petersburg and Vyborg, Russia, during the past seven days. The rumors that Russian and Belarusian sellers are examining the possibilities to direct cargoes to South American receivers appear to have disappeared for the time being. It was heard that Brazilian buyers were interested to look at taking a parcel of SN150 and SN500 base oils, but were unimpressed with the guaranteed quality offered, from what is thought to be Gazprom production.

Russian base oil sellers such as Lukoil, having broken into the Indian market and having established India as one of their new markets, are finding that selling base oils into that market is becoming more difficult as buyers opt for local production. Local production is growing due to huge quantities of cheap Russian Urals crude oil being dumped into Indian refineries.

With the ruble falling to its lowest level against the U.S. dollar on Monday, economic pressure is building on Putin to escalate all exports from Russia, including crude and petroleum products. Although base oils will play a small part in the larger game, Russian companies such as Lukoil, Gazprom and Rosneft will be pushed by the Kremlin to maximize exports in order to generate foreign currency earnings.

It is also feasible that Russian refineries will start trying to export quantities of Group II and Group III base stocks, which could be of interest to Latin American buyers. There are reports, though, that the Russian market is desperate to access the limited Russian production of Group II and Group III base stocks.

Traders are offering Russian base oils to Nigerian receivers with little success of uptake so far. Finance and quality parameters still stand in the way of a cargo being successfully sold into Nigeria.

Baltic cargoes will continue to load for discharge into Gebze, Turkey, and Singapore, but are only reported following discharge. With no shipping details listed in marine reports, information is obtained from local shipping agencies in the various ports.

FOB prices for Russian SN150 and SN500 ex St Petersburg or Vyborg are estimated on a netback basis from the new prices being currently offered into Nigeria, after taking freight and margins into consideration. Prices could be $745/t-$775/t for SN150 and $785/t-$795/t for SN500, basis FOB. Blended SN900 could be priced at around $840/t using SN1200 or Russian bright stock.

Blending operations in Turkey have gone exceptionally quiet the past week, with many companies closing for the whole month of August. Some are doing basic maintenance on machinery and production lines. Management has requested staff to work for flat fees to effect repairs and maintenance to plant and equipment. Apparently, a number of companies have adopted this practice, offering relatively large payments to entice workers to participate.

Prime European banks continue to pile pressure on domestic Turkish banks that have trading relationships with Russian banks and suppliers. Some banks in mainland Europe have now decided to cut ties with certain Turkish banks, striving to avoid running afoul of European Union rules and sanctions.

Russian imports continue to dominate the Turkish market. The latest information pegs prices at $825/t-$850/t for SN150 and $835/t-$865/t for SN500, basis CFR Gebze. The Tupras “export” tender for around 7,000 tons of Group I grades appears to have been abandoned due to little buying interest from any third parties. A Nigerian possibility failed because the grade spilt did not allow for a large quantity of SN900 to be assembled.

Tupras raised its prices in the domestic market to compensate for the declining value of Turkey’s lira in relation to the U.S. dollar. Its reissued prices are Tl 35,356/t for spindle oil, Tl 30,5971/t for SN150, Tl 32,875/t for SN500 and Tl 45,164 for bright stock. Prices in lira are offered ex rack, plus a loading charge of Tl 5,150/t.

Group II grades, imported and resold on an FCA basis, are priced at €,1325/t-€1,375/t for the 100N, 150N and 220N and at €1,520/t-€1,555/t for 600N. Group II base oils have been coming into Turkey from Red Sea sources, the U.S. and South Korea, but Russian Group II grades have recently appeared and are reported to be around €100- €150 lower than the former products.

Partly-approved or non-approved Group III base oils on an FCA basis includes the Tatneft 4 centiStoke grade. This base oil is priced at around €1,395/t. Other material is missing from storage, having been previously imported from U.A.E., Bahrain and AsiaPac. These grades had FCA prices between €1,625/t-€1,670/t, but most of these stocks have been depleted.

Smaller quantities of fully-approved Group III grades from Cartagena refinery in Spain continue to be delivered into Gemlik and are then resold on an FCA basis to local blenders. Prices are maintained between €1,960/t-€1,995/t FCA.

Middle East

The record shipments loading out of Yanbu and Jeddah appear to have continued through July, but havens started to slow due to two principal factors. Blenders in U.A.E. have been running down existing inventories which were built up during the first half of this year, because of concerns for supplies from Red Sea. The Houthi attacked threatened to block base oil supplies from Saudi Arabia, but this problem has somehow been solved either by arrangements with Yemeni authorities, or by chartering approved flagged vessels.

Cargoes continue, but now to a lesser extent, to the west coast of India, U.A.E., Pakistan and Singapore.

With India moving towards surplus Group I production the opportunities for Luberef to supply this market may diminish over the next few months or years. More emphasis may be placed to move Group I and Group II cargoes to Turkey and Europe, which could fit in with future requirements from Ukraine.

With the latest news of the possibility for all-out warfare between Israel and Iran and its proxies, Hezbollah, Hamas and Houthis, the Middle East region is watching the situation extremely carefully. Even talking to sources who have left the region for the summer, remote access and daily contact is being maintained to ensure that there are no unplanned fall-outs from this potentially increasing conflict.

The region is on tenterhooks with reports that Iran has prepared for a massive drone and missile strike on Israel, and with the Supreme Leader Ayatollah Ali Khamenei calling the shots, communications between Western leaders and the new president of Iran may prove to be a fruitless exercise.  Expectations are running high that a Hezbollah strike will lead the attack, with Iran directly following up these strikes.

Israeli leaders have issued briefing statements that the IDF will act swiftly and decisively to counter any attack on Israel or its citizens.

Base oil trading and supply in Middle East regions will come under renewed threats from interruptions to supply chains and logistics.

Politically, Iran continues to have relationships with U.A.E., Pakistan, India and Oman but not with the Saudis, pushing the region towards instability. In the meantime allied forces from the U.S. and the United Kingdom are sending further support in the form of more naval firepower which could be used defensively to counter attacks on Israel.

Iranian base oil producers Sepahan and Iranol continue to supply quantities of SN500 and SN150 through the ports of Bandar Bushehr and Bander Khomeini. Exports move mainly to United Arab Emirates and Pakistan. Indian receivers formerly took considerable quantities from Sepahan, but due to a growing surplus of Group I base oils in the Indian market, India will no longer be available to Iranian exporters.

Many U.A.E. blenders have closed down for August and say that they will only restart operations when the Israeli and Iranian stand-off quietens down, which many privately believe will happen prior to September. Many key players have made their way to European and U.S. destinations where they will remain for the next few weeks.

Middle East Gulf operations are turning away from western arbitrages which are currently closed between the U.S. and Europe, and are looking for support for Group I and Group II supplies from AsiaPac and Red Sea sources. Thailand and Indonesia and being targeted as potential supply points for the future, with Singapore facilities currently undergoing maintenance, currently stemming the flow of base oils.

Russian cargoes are still in evidence in U.A.E., with the Indian market declining for Russian barrels due to the increase in Group I production from Indian refineries.

Russian base oil prices on a CFR basis U.A.E. were heard at $845/t in respect of SN150 and $855/t for SN500. Parcels of around 5,000 tons load from Limas terminal in Turkey, with only a couple of larger cargoes of up to 12,000 tons loading out of St Petersburg in the Baltic.

Netbacks for Group III exports from Al Ruwais and Sitra in respect of partly-approved base oils, are maintained following recent adjustments, with prices in Europe and the U.S. perhaps showing as artificially stable due to holidays and lower demand.

Indications are placed in a range between $1,275/t-$1,300/t in respect of the 4, 6 and 8 cSt Group III grades. Netbacks in respect of Shell GTL Group III+ base oils ex Ras Laffan in Qatar also remain unchanged, and are currently assessed to be around $1410/t-$1445/t. Levels are given as estimates or indications only, since Shell cargo economics and cost allocation are not disclosed.

Netback levels are assessed from distributors’ selling prices, less estimated marketing, margins, handling and freight costs.

Group II base oils sold ex tank in U.A.E., or on a truck delivered basis in U.A.E. and Oman, have prices maintained. Selling levels appear as relatively high compared to other regions, but these grades are being resold through a chain of traders, with margins to be made at every step. Prices are reported between $1685/t-$1725/t in respect of 100N, 150N and 220N, with 600N between $1775/t-$1825/t. Some of these grades are sold in U.A.E. dirhams, since that currency is based on the U.S. dollar. High ends of the ranges refer to RTW deliveries to buyers in remote locations in U.A.E. and Oman.

Africa

This report has heard from sources in Durban that the large cargo of base oils has loaded out of the two European ports and is currently enroute to South Africa. It would seem that there may be a quantity of base oil on board which could be allocated to receivers in Mombasa, but this is unconfirmed. It is anticipated that arrival into Durban would be during second half September.

West Africa remains subdued with receivers in Guinea, Cote d’Ivoire and Ghana fully replete with supplies of base oils, and Nigeria still in the midst of the rainy season which, although not closing down business activities, does limit transportation of goods to more remote locations due to localised flooding.

No more news has been heard regarding any potential Russian cargo(es) for Nigeria. Finance and payment options are still believed to be major hurdles to overcome in promoting base oil sales in Nigeria. Without payment guarantees ( which used be in the form of letters of credit issued locally, and subsequently confirmed by prime European banks ) trading in this environment could amount to financial suicide, should buyers withhold or delay payments for material which has already been discharged into tank.

There may potentially be a large cargo which could be sourced out of the U.S., perhaps loading in September when stockbuilding will be completed for the hurricane season. Should precautionary stocks not be required, then sellers will be keen to move material to export markets, which could include Europe and Nigeria.

Finance remains as an issue and until this aspect is sorted out no vessel will be chartered and no contracted supplies will be confirmed by traders.

Prices CFR Apapa in respect of potential ‘future’ trades, arriving perhaps during September and October, are indicated at around $1,155/t-$1,180/t in respect of SN150, $1,225/t-$1,245/t for SN500 with SN900 at around $1,300/t-$1,335/t. These prices are for illustration only and will only become relevant when the banking and finance gets sorted out in Nigeria.

Russian offers are much lower. Last levels heard were indicated at $995/t in respect of SN150, $1,035/t for SN500, with SN900 at $1,075/t, all basis CFR Apapa.

Ray Masson is director of Pumacrown Ltd., a trader and broker of petroleum products in London, U.K. Contact him directly at pumacrown@email.com.

Lubes’n’Greases shall not be liable for commercial decisions based on the contents of this report.

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