Base oil prices have not yielded despite the highly volatile but strongly down trending crude oil prices. Sellers are generally unwilling to lower prices and prefer to limit supply to support prices.

United States
After a period of strong markets and subsequent price increases markets finally leveled out. The holiday season is starting which usually reduces activity and makes for thinner trading. Supply is still tight so it is mostly weaker demand that has caused markets to stabilize. Also weaker than expected housing sales and employment figures caused market participants to take a more defensive stand on the economic recovery in the US. Sentiment was bad with equity markets going down substantially for the second week in a row.  
 
Europe
European base oil prices have edged higher during the week. Contracted business took up part of the supply, while spot trades added to demand to drive prices up slightly. In such tight markets as we have today a relatively small increase in demand can set the price higher since the supply side makes no effort to give the market some breathing room. In Europe Russian base oils were offered at USD 975,-/mt ex tank for SN500. The situation in the Baltic is not much better. Russian material is also in short supply and trades are few and mostly small in size. Last weekend the vessel MT Motivator with 12.000mt lubes on board with destination Jakarta/ Surabaya was hijacked at the Gulf of Aden.

Asia
Prices remained mostly stable this week. Production in Asia remains at healthy levels at the supply and demand dynamics still seem quite balanced although both are at low levels and trading is thin. The rumor that a large oil producer would raise prices next month added to the unwillingness among sellers to lower prices although more than a few sellers seem to think that raising prices further will not be tolerated in the current market environment where the economy both in China and in the West are losing momentum.

India
There was very little activity in India this week. Inventory levels of domestic refiners are still high and they are looking to sell on export bases. The appreciating Rupee against the dollar suggests that domestic prices may have to be adjusted downward which may in turn stimulate domestic demand.  

China
Prices for group I base oils came under pressure as Sinopec announced that it would lower its July prices. Despite relatively high inventory levels PetroChina did not lower its prices. Because of maintenance on one of their refineries output was lower in July, which may explain why PetroChina chose to keep prices constant. Import prices did fall on rumors that foreign trade partners are lowering offer prices.

Futures markets
The front end of futures markets have dropped around USD 6,50 which is in line with spot markets. This has pulled down the longer dated future prices although the decline has been slightly smaller than in the spot markets. Future prices still point to higher prices in the future, trading at USD 74 for the end of 2010, USD 77 for the end of 2011 and rising to USD 83 for the December 2015 future. The same picture can be seen in the gasoil futures  where markets price in a steep price increase until the end of 2011 and flattening afterwards. The rising futures markets reflect the healthy fundamentals for these markets but price levels indicate that futures markets do not expect a quick solution to the current economic problems since the whole curve came down significantly while a perceived quick solution would suggest that only the front end of the curve would fall.

Macro highlights
Last week brought some disappointing macroeconomic news to which markets reacted vigorously. The sovereign debt crisis in Europe still controls the headlines. Both EMU member states and the United Kingdom are taking the route of large cuts on government spending combined with aggressive economic reform. Although in the long run this will lead to a healthier economy and a return to a higher sustainable economic growth rate, the result in the short run will be lower growth and possibly a fallback into recession.

The US as always chooses the path of economic growth to reduce the debt-to-GDP ratio, a solution which simply calls for a higher nominal growth rate than the increase in debt. To this background it is not surprising that markets reacted disappointed to worse than expected numbers on home sales and job growth in the US. Job growth is key to a sustainable economic recovery, while the US housing market needs to stabilize and preferably recover to give consumers sufficient comfort to start spending more and for banks to increase lending. 

The third important theme for financial markets is growth in China which is viewed as the prime source of economic growth now that Western economies are most likely headed for years of sub-trend growth. The fact that the Chinese government is taking measures to slow down growth to avoid an overheating economy leads to fear among market participants that growth will fall back on a worldwide bases. In this environment asset prices will most likely remain under pressure until the path of economic  recovery has become more clear.

The WTI crude price fell this week from USD 79 to USD 72 in a reaction on the turmoil on financial markets and fears that the economic recovery is stalling. This once again illustrates the cyclical nature of energy prices. With the economic cycle appearing to peak in the US, Europe still in a near zero growth environment and China being already on the way down to a lower, more sustainable growth path the fundamentals for a recovery of crude prices seem weak in the coming months.