China's Group III base oils supply remained firm in June despite a sharp decline in Middle East imports, as rising domestic production insulated the country from the global premium-grade supply disruption.

Group III supply, or output and imports combined, held above 52,000 tonnes for a second straight month, up 23% year on year and above the 12-month average of around 48,000 tonnes, General Administration of Customs and OilChem China data showed.

Group III imports from the Middle East followed the same pattern as Europe and the US, falling to around 9,000 tonnes in June from more than twice that level before the Strait of Hormuz disruption.

But unlike Europe and the US, Group III supply rose rather than fell.

Domestic Group III production rose to a 15-month high in June, adding to a pick-up in output in May and allowing local refineries to cover more of the overseas shortfall.

China’s domestic Group III prices surged at the end of the first quarter and start of the second, then began to lag the rise in Europe prices, a sign that China was then better supplied with Group III than Europe.

Key Highlights

·         China's overall base oils supply exceeded 600,000 tonnes for the fifth time in eight months, after doing so only twice in the previous three years.

·         Imports accounted for the smallest share of China's base oils supply in six months, even as total supply continued to rise.

·         Group II supply extended its steady expansion while Group I continued lagging other grades.

·         Second-quarter Group III supply rose to its highest since the first quarter of 2025, even as imports' share fell below 30% from more than 40% previously.

Market Repercussions

China's Group III market is increasingly diverging from Europe and the US, where lower Middle East imports translated directly into tighter supply and greater dependence on replacement cargoes.

That followed the construction of additional Group III production capacity in recent years, with the recent surge in prices giving refiners good reason to run the units harder.

China’s steadier supply left refiners in a stronger position to respond to widening overseas arbitrage opportunities, and allowed lubricant blenders to expand exports into markets where premium-grade shortages were constraining local production.

Higher domestic production increasingly allowed China to meet more of its own Group III requirements while exporting more to overseas markets. That combination strengthened China's position in the premium-grade market even as other regions struggled with tighter supply.