India's base oils and lubricants demand extended its recovery in August, adding pressure to a domestic supply balance already strained by lower output, high exports and weak imports amid regional disruptions.

Demand rose 12% year on year to 416,000 tonnes in August from 414,000 tonnes in July, Ministry of Petroleum and Natural Gas data showed. It was the highest level in five months and the strongest August on record.

Demand often faces a seasonal slowdown during the monsoon period but instead extended July's rebound after four straight months of year-on-year declines.

Record-high automobile sales for August, including unusually strong rural sales, provided another indication of firm economic activity despite the weak monsoon.

The stronger demand came as India entered the third quarter with supply already falling short of domestic requirements, limiting blenders' ability to replenish stocks ahead of the seasonal demand pick-up.

Key Highlights

·         August demand was the highest in five months and rose from July for only the second time in five years.

·         Automobile sales rose for an eighteenth straight month, with rural sales outpacing urban growth despite the weak monsoon.

·         Asia’s base oils exports to India in July were the third lowest in 22 months, after hitting their lowest levels for the period in May and June.

·         US base oils exports to India remained negligible in July for a fourth month, while Singapore’s shipments to the country remained unusually low into early September.

·         CFR India Group II prices moved to a premium to FOB Asia prices in August for the first time in four months, rebounding from a steep discount as recently as early July.

Market Repercussions

India will need more supply to meet the stronger demand, but some of its traditional sources are becoming less reliable. Taiwan is heading into maintenance and Singapore's recent recovery in shipments has been uneven. Saudi shipments remain disrupted, while US market supply remains tight.

India could also face greater competition from China for Asian barrels as its own supply balance tightens, adding another source of demand for regional supplies.

Higher CFR India prices are already improving the economics of imports, but stronger Chinese domestic prices are also making that market more competitive for Asian barrels.

New domestic production capacity could provide some additional supply, reducing some of the pressure on imports.

With demand heading into its seasonal rise and India competing with other buyers for constrained Asian supply, blenders' moves to rebuild stocks could stay under pressure in the weeks ahead.