China’s base oils output held in a narrow range for a fourth month in August, but weaker Group II production and falling imports are tightening domestic availability as more barrels move overseas.

China's ability to meet its own base oils needs had let it sidestep many of the supply disruptions squeezing other markets and capture high overseas prices through surging exports.

That balance is becoming harder to maintain as imports fall, exports surge and higher diesel prices put further pressure on refinery economics.

Paraffinic base oils output rose to around 520,000 tonnes in August, up 6% year on year and holding in a 512,000-533,000 tonne range over the past four months, OilChem China data showed.

The composition of that supply changed sharply, with Group III production climbing to a 17-month high while Group II output fell to a nine-month low.

The divergence coincided with different economics for the two grades. Group III commanded a growing premium over Group II and feedstock costs, encouraging refiners to raise output. Group II prices fell relative to diesel to their lowest level this year, adding pressure to production economics.

Key Highlights

·         Group III output rose to more than 45,000 tonnes in August, the third-highest in at least five years, with production of close to 170,000 tonnes in the four months to August matching the strongest four-month total in at least five years.

·         Group II output fell for a second straight month to less than 415,000 tonnes, the lowest since last November, while Group I rose to a seven-month high.

·         Total base oils supply already fell to a nine-month low in July as imports dropped to their lowest level in 33 months and exports surged to a record high.

Market Repercussions

China’s Group II market faces a tighter balance heading into the autumn oil-change season, with domestic production weakening and imports still uneconomic.

Higher Group II prices would give refiners more reason to raise output and could eventually reopen imports, giving the market two ways to replenish supply. Neither route has become attractive enough yet.

The July supply decline showed the repercussion of that price divergence, with imports falling to a 33-month low while exports reached a record. A similar combination through the autumn would leave less domestic supply available as seasonal demand strengthens.

Group III faces a different balance. The widening premium over Group II and feedstock costs is encouraging higher production, but Chinese prices remain attractive relative to higher prices in the US and Europe, keeping exports profitable. That could limit how much of the additional Group III production stays in China.