Mexico's lubricants demand rose to a 13-month high in June, but base oils supply grew even faster, widening a gap seen before when US exports far exceeded domestic demand.

The divergence contrasted with other markets in Latin America, where supply stayed tighter even as lubricants demand fell.

Mexican lubricants consumption rose to more than 61,000 kilolitres (54,400 tonnes), up 8% year on year and the fourth increase in five months as a surge in automobile lubricants consumption outpaced a decline in industrial oils use, INEGI data showed.

Mexico's own supply grew even faster than its demand.

Its lubricants demand fell as a share of the country's base oils imports in June, while those imports shrank as a share of US base oils and lubricants exports to Mexico to the lowest level in a year.

That combination mirrored an earlier period when US exports to Mexico far exceeded domestic lubricants demand, with part of the surplus used as a diesel fuel extender.

The rise in shipments to Mexico helped push US base oils exports to Latin America to an eight-month high in June, triggering a surge in the region’s supply surplus versus demand.

Key Highlights

·         Latin America's lubricants demand slipped to less than 190,000 tonnes in June, down 7% year on year and falling for a second straight month, ANP, INEGI, Ministry of Economy and other government data showed.

·         South American demand, excluding Mexico, fell by a steeper 12% year on year to a four-month low.

·         Brazil, Argentina, Chile and Uruguay all recorded weaker lubricants consumption.

·         Latin America’s supply, or regional output and US exports to the region combined, outpaced demand by more than 40,000 tonnes, the largest volume in more than three years.

·         South America’s supply surplus rose to just over 10,000 tonnes, its highest in three months but still well below typical levels.

Market Repercussions

Any repeat of Mexico’s widening supply surplus would point to a reversion of previous trends and absorb more US supply at a time when US base oils availability is tighter and South America’s supply balance has moved much closer to demand.

The tighter balance has reversed the large inventory-build earlier in the year, requiring more frequent procurement to maintain sufficient stocks.

The buying pattern points to expectations of sufficient availability, but also leaves the market more exposed to any disruption in US supply.

Even without any weather-related disruptions during the hurricane season, an extension of the recent increase in flows to Mexico would further reduce the US supply available to other Latin American markets.

Buyers would then be more reliant on supplies from more distant sources, including Asia.