China’s base oils output stayed above 500,000 tonnes for an eighth straight month as strong margins and overseas prices offset weak domestic demand
Competitive domestic prices kept export opportunities open, giving refiners an incentive to direct more barrels overseas as supplies tightened elsewhere
A seasonal recovery in Chinese demand could draw barrels back into the domestic market just as Group III supply faces further maintenance and Middle East disruptions
China's base oils output stayed high in July, as refiners leaned on strong margins and firm overseas prices to offset weak domestic demand.
Output came to more than 515,000 tonnes in July, down from more than 530,000 tonnes in June, OilChem China data showed. The volume was still up 21% year on year and marked a ninth straight month of annual growth.
Output has now held above 500,000 tonnes for eight straight months, a level reached only twice in the previous four years.
Output stayed high even in the face of plant maintenance, a seasonal slowdown in demand and elevated feedstock prices, factors that refiners in other overseas markets also faced.
But supply in markets including the US and Europe tightened in the second quarter, leaving buyers competing for fewer barrels.
The contrast with China was significant. Its relatively steady supply and increasingly competitive prices gave its refiners the opportunity to increase shipments abroad, partially offsetting weaker demand in its domestic market.
Key Highlights
· Group II production fell to an eight-month low of less than 420,000 tonnes, a drop tied to plant maintenance work, while Group I output edged up to a four-month high.
· Domestic N150 prices stayed unusually weak against FOB Asia levels, keeping the import arbitrage shut but giving refiners more reason to boost exports instead.
· Group III output edged below 40,000 tonnes but stayed close to a 16-month high for a third straight month.
· China’s domestic Group III price premium to Group II widened further, adding to refiners’ incentive to maximise output and shift toward Group III where possible.
Market Repercussions
Domestic demand typically revives later in August, ahead of the market's usual seasonal pickup. Higher output would help meet that demand, especially if China’s base oils imports stay lower.
The slump in South Korea’s base oils exports to China in July pointed to such a scenario.
Firmer demand and lower imports could trim supplies available for export, including Group III base oils.
Any such slowdown would coincide with planned Group III plant maintenance work in Asia and Europe during the third quarter of the year, combined with ongoing disruption to Group III shipments from the Middle East.
China’s domestic Group III prices are already at record highs relative to Group II. Refiners now face the prospect of rising demand in domestic and overseas markets as Group III supply tightens further across major markets.