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US base oils producer prices rose for a fifth straight month in June even as crude oil and overall producer prices declined
Base oils continued outperforming diesel as tightening supply fundamentals outweighed movements in crude
The loss of Middle East Group III supply points to continued pressure on base oils prices even if broader inflation remains subdued
US base oils producer prices rose for a fifth straight month in June, extending their outperformance as supply shortages outweighed falling crude prices.
The producer price index (PPI) for base oils rose 7% in June from May, Bureau of Labor Statistics data showed. The increase slowed from May's 50% surge but extended a run of monthly gains even as overall US producer prices fell from May for the first time in 10 months.
The divergence pointed to increasingly tight base oils supply rather than movements in crude oil.
Diesel prices also outperformed crude oil in June, supported by increasingly tight supply fundamentals. The outperformance extended into July, with the diesel premium to crude rising to its highest since end-March.
Base oils supply fundamentals were even tighter, especially for premium-grade volumes, supporting an even wider price premium to diesel and crude.
Key Highlights
· The finished lubricants PPI also rose, climbing 2.6% from May and extending gains to a fourth straight month.
· Diesel prices continued outperforming crude during June as distillate inventories remained historically tight, supporting refinery incentives to maximise diesel production.
· Crude and diesel prices both rebounded sharply in first-half July, adding fresh upward pressure to an already tight base oils market.
Market Repercussions
Base oils prices continued pulling away from crude during June as supply remained tighter than in crude and diesel markets.
Diesel prices strengthened further in July, increasing competition for refinery feedstocks at a time when the global base oils market was already short of premium-grade supply.
Middle East producers previously supplied more than 200,000 tonnes of Group III base oils a month. Alternative crude oil supply is widely available. Group III is not.
Existing producers have only partially replaced those volumes despite higher South Korean output and delayed maintenance elsewhere.
Until additional Group III supply returns, base oils prices are likely to be driven more by availability than feedstock costs.
