Americas/EMEA base oils - week of May 15: Supply outlook

·        Diesel prices stay weak relative to crude and to base oils.

·        Weak diesel prices/firm base oils values incentivize refiners to increase base oils output.

·        Higher US base oils output would coincide with already-healthy availability.

·        US supply surplus lingers into Q2 2023 even after producers clear record volume of supplies through export market in late Q1 2023.

·        Ongoing flow of arbitrage shipments from US highlights need to remove lingering surplus.

·        Ongoing surplus reduces producers’ leverage to target higher prices.

·        Ongoing surplus, combined with high base oils prices relative to diesel, instead raise blenders’ expectations of further fall in outright prices.

·        US base oils prices already stayed under pressure in Q1 2023 despite slump in Americas’ February base oils supply to a two-year low.

·        Price pressure suggested that demand weakness outweighed the size of the fall in supply.

·        Current price pressure is unusual at a time of year when prices usually rise.

·        Lingering surplus US supplies highlight repercussions of domestic blenders’ delayed stock replenishment and signs of moves to hold smaller inventories than previously.

·        Lingering surplus highlights need for refiners to be able to clear volumes fast to avoid large supply-build.

·        US base oils exports surge to record high in March, with swathe of surplus volumes moving to markets like Mexico.

·        Shipments to those outlets limit more widespread market impact by curbing supply-build in higher-priced markets like Europe.

·        Access to alternative outlets for US supplies likely to extend into Q2 2023 amid tighter surplus availability in Europe and Asia.

·        Argentina may need to rely more on domestic base oils production or US supplies over coming months amid tighter surplus availability in Europe and less attractive arbitrage for Asia-Pacific supplies.

·        Argentina’s March base oils imports jumped on back of wave of arbitrage shipments from those markets and from Mideast Gulf, balancing out fall in domestic output.

·        Fall in Americas Q1 supply mostly reflected planned factors such as plant maintenance work.

·        Periods of unexpected drop in supply tend to have larger market impact because buyers and sellers have less time to prepare accordingly.

·        Europe’s base oils supply likely to stay more balanced in Q2 after refiners cleared surplus in Q1.

·        Steady regional demand in Q2 likely to limit any significant rise in surplus supply.

·        Drop in competition from Russian supplies for markets like West Africa provide European refiners with convenient outlet for surplus volumes.

·        Removal of Russian supplies from European market provide refiners with additional regional demand.

·        US exports to Europe in March and Q1 2023 hold steady rather than surge, curbing any build-up of surplus supplies in European market.

·        Europe’s Group II supply could get a boost in coming months as firm prices boost attraction of moving more US/Asia cargoes to the region.

·        Europe’s Group III base oils supply likely to tighten during Q2 2023 amid overlapping plant maintenance in Spain and South Korea, and slump in supplies from Indonesia.

·        Spain’s April Group III base oils exports already fall to four-month low even before maintenance work begins.

·        Europe’s refiners face challenge of avoiding supply-build in Q3 2023, when demand is set to fall.