Asia's May Lubricants Demand Falls, Surplus Widens

• Asia's lubricants demand fell to a nine-month low in May as disruption-driven buying continued unwinding across the region

• Demand weakened faster than supply, widening Asia's surplus despite slower production growth

• The broader surplus continued shrinking as Middle East imports faded and exports from Singapore and Taiwan weakened

Asia's lubricants demand fell to a nine-month low in May, widening the region's base oils surplus even as underlying supply tightened.

Demand fell to a nine-month low of less than 820,000 tonnes in May from more than 880,000 tonnes in April, Ministry of Energy, METI, KPA, PSA and other government data showed. The volume excludes China.

Demand weakened across most of the region, with consumption in Northeast Asia sliding to a 21-month low.

Supply also eased.

Asia's base oils production fell below one million tonnes for only the second time in six months as output declined across most producing countries. South Korea offset part of the decline after production climbed close to a four-year high.

Demand weakened more than supply, widening Asia's surplus over domestic output to more than 130,000 tonnes from more than 120,000 tonnes in April.

The broader market picture continued tightening.

Middle East premium-grade imports into Asia almost halved during May, while exports from Singapore remained unusually weak and Taiwan's shipments slowed sharply in June.

Those developments pointed to a structurally smaller regional surplus than the monthly balance alone suggested.

Key Highlights

·         Demand growth slowed to its weakest pace in almost a year as buyers continued reducing inventories built earlier in the disruption.

·     A 5% rise in Indian consumption was the main reason the region avoided an outright contraction.

·         Middle East Group III imports into Asia fell to less than 40,000 tonnes in May from more than 65,000 tonnes in April and were set to shrink further in the coming months.

·         Including Middle East imports, Asia’s total supply surplus narrowed from April and fell below year-earlier levels.

Market Repercussions

The wider May surplus reflected weaker demand rather than improving supply.

Buyers continued delaying purchases while working through inventories accumulated in March and April. Falling base oils prices and the seasonal slowdown in July further reduced the incentive to rebuild stocks.

Lower shipments from Singapore, Taiwan and the Middle East meant supply became increasingly dependent on South Korea maintaining elevated production over the following months.

The combination pointed to a smaller-than-usual regional surplus through the third quarter.

That would reduce the availability of arbitrage cargoes into more distant markets, and leave Asia's own buyers with less supply to draw on as seasonal demand recovers later in the quarter.