US base oils and finished lubricants price inflation eased in August after a seven-month surge, even as diesel prices accelerated and made motor fuel production more attractive to refiners.

The producer price index (PPI) for base oils fell 0.4% in August from July, Bureau of Labor Statistics data showed, ending six straight monthly increases. The index remained at its second-highest level on record after rising 140% in the six months to July.

The finished lubricants PPI also fell for the first time in seven months, down 0.1% from July, while likewise holding at its second-highest level ever.

The pause contrasted sharply with renewed increases in crude and distillate prices. Crude oil producer prices rose for the first time in three months in August, while heating oil and distillates prices extended a second straight month of much steeper gains.

The strength in distillates reflected tight supply amid war-related disruptions to refinery production in Russia and the Middle East. US refiners were already running close to full capacity, limiting their room to raise output further to offset the loss.

The base oils PPI paused even with little sign of the underlying supply squeeze easing. Steady base oils prices and surging diesel prices could give refiners fresh reason to prioritise motor fuels output over base oils.

Key Highlights

·         The broader PPI rose 0.4% in August even as base oils and lubricants prices fell.

·         Crude oil PPI rose 5.2% in August, while heating oil and distillates PPI rose 15.3%, extending a second straight month of sharp gains.

·         US refiners ran at 97.8% of capacity in the week to 4 September, holding close to multi-year highs, Energy Information Administration data showed.

·         US distillate stocks remained about 13% below their five-year average even at that pace, EIA data showed.

Market Repercussions

Diesel's premium over crude oil widened further into September, while its discount to base oils narrowed, making motor fuel production more attractive to refiners.

A typical seasonal slowdown in US base oils demand, rise in surplus supply and fall in prices in the fourth quarter could add to the attraction of prioritising diesel.

Any reduction in base oils output would follow a summer when US arbitrage shipments were already lower than usual, while tight stocks started the third quarter at a five-year low.

With US base oils imports from the Middle East unlikely to recover any time soon, US refiners will need to cover more of the country’s domestic demand for longer.

A further shift in refinery output toward diesel would make that task harder, leaving the US market tighter than usual in the fourth quarter.