Japan's July Base Oils Demand Rises For First Time In Three Months

Japan's domestic base oils demand rose in July for the first time in three months, adding to signs of firmer Asian demand that could limit the size of a supply build during the third quarter.

Domestic base oils and lubricants demand rose 4% year on year to 166,400 kilolitres (147,000 tonnes), Ministry of Economy, Trade and Industry data showed.

The increase lifted total consumption to 1.09 million kilolitres in the first seven months of the year, up 14% year on year, even after the dip in consumption in May and June.

Buyers ran down inventories during those two months after building them earlier in the year to cover against supply disruptions.

Firmer demand extended to some of Asia’s largest markets, suggesting the destocking that dominated those two months was waning, with buyers comfortable securing supply as needed rather than holding larger inventories.

Demand improved even as base oils supply remained constrained, reducing the surplus that typically builds during the third quarter.

Key Highlights

·         Total demand, or domestic consumption and exports combined, rose to 185,500 kilolitres, the highest in four months and second-highest in two years.

·         Domestic demand accounted for 90% of total demand, up from 85% in June and the largest share in a year.

·         Base oils exports fell to a five-month low, with shipments to China dropping to a five-month low and flows to Southeast Asia falling to a four-month low.

·         Japan's industrial oils consumption rose 10% year on year in June, the fourth increase in five months, while automobile lubricants demand fell 6%, a second straight monthly decline.

Market Repercussions

Destocking in May and June had partly offset the impact of lower supply heading into the third quarter, as buyers drew on existing stocks rather than adding to the region's tightness.

That phase is now ending in markets including Japan and India, with the firmer demand limiting the impact of a seasonal August slowdown and leaving less room for the region's typical third-quarter supply-build.

Asia’s Group I and Group II base oils prices fell relative to diesel in August, when demand typically bottoms out. The widening diesel premium to crude magnified that base oils price weakness, giving refiners even more reason to prioritise diesel production over base oils.

Together, firmer buying, lower supply and refiners' preference for diesel over base oils point to an even smaller surplus build-up before consumption recovers later in the third quarter.