Latin America's base oils supply flipped into a shortfall in July as a slump in US exports more than offset a rebound in regional output, tightening the market even as lubricants demand remained relatively steady.

Supply, or regional output and US exports to Latin America combined, fell to 192,000 tonnes in July from more than 225,000 tonnes in June, down 9% year on year, INEGI, ANP, Ministry of Economy and other government data showed.

Regional lubricants consumption rose 1% year on year to 214,000 tonnes, after declining for two straight months. That left supply lagging demand by more than 21,000 tonnes, the largest shortfall in four months and a reversal from a surplus of more than 30,000 tonnes in June.

A similar shortfall opened up in March, but for the opposite reason. That gap reflected a surge in demand as buyers built stocks against supply disruption risk. The demand surge then unwound over the following months.

July’s shortfall reflected a slump in US exports instead. The slowdown could prove harder to reverse as US refiners focus on meeting more of their own domestic demand, curbing volumes available for export.

Key Highlights

·         US exports to Latin America fell to 132,000 tonnes in July from more than 180,000 tonnes in June, declining year on year for the first time in 13 months.

·         Regional output rose to more than 60,000 tonnes from around 43,000 tonnes in June, the highest in a year, after the completion of planned maintenance in Brazil.

·         South America's own supply lagged demand by 36,000 tonnes, up from 14,000 tonnes in June and the largest shortfall since March, when demand, rather than supply, was the cause.

·         Mexico's lubricants demand fell 1.4% year on year to 55,400 kilolitres (49,000 tonnes) in July, the second decline in three months after an 8% rise in June.

·         Mexico's automobile lubricants demand edged up 0.2%, while industrial oils use fell 5%, a fifth straight monthly decline.

Market Repercussions

The market flipped to a shortfall despite a rebound in regional base oils output and relatively steady lubricants demand, showing the large role US exports play in the region's overall balance.

That dependence, and the prospect of US exports staying lower than usual for several more months, increases the need for buyers to line up alternative sources.

South Korean exporters have already increased shipments to Latin America. Their shipments surged to a record in August after already rising sharply in July, as refiners leaned on an open Group II arbitrage to the region.

An extension of the Latin American shortfall would deepen that reliance on alternative sources, with US export volumes unlikely to recover until the country's Group III imports return to more typical levels.