Japan's May Base Oils Surplus Masks Grade Supply Mismatch

• Output fell to a three-month low in May, but domestic demand fell faster, widening the output surplus to an eight-month high

• Premium-grade imports fell to a 28-month low, widening the gap between abundant domestic supply and tighter availability of higher-quality grades

• The imbalance pointed to stronger exports of domestic grades alongside continued import demand for premium base oils

Japan's base oils surplus widened to an eight-month high in May despite lower output and imports, exposing a growing mismatch between domestic production and tighter premium-grade supply.

Total supply, combining output and imports, fell to less than 177,000 kilolitres (156,000 tonnes) in May, from more than 191,000 kilolitres in April, METI data showed.

Total demand fell to less than 150,000 kilolitres, its lowest in eight months, widening the net surplus to close to 27,000 kilolitres from 6,200 kilolitres in April.

The surplus was the largest in eight months but masked a deeper imbalance. The grades Japan produces domestically were in ample supply; the premium grades for which it relies on imports were increasingly tight.

Key Highlights

·         Imports fell to just over 7,000 kilolitres, the lowest level in 28 months and less than half the monthly average during the year to March.

·         Shipments from Qatar dropped to a 19-month low after already falling sharply in April, while imports from South Korea also edged lower.

·         Imports accounted for just 4% of total supply, down from 5% in April and the lowest share since January 2024.

·         The output surplus over domestic demand rose to an eight-month high of more than 48,000 kilolitres, pointing to standard domestic grades accounting for most of the overhang.

Market Repercussions

Japan's domestic surplus left more standard grades available for export, even as the country required more premium-grade imports.  

Japan's domestic production is weighted toward Group I grades, while Group III imports fell to their lowest level in more than two years.

Domestic production comfortably covered total demand, leaving more standard grades available for export.

At the same time, shrinking imports from Qatar and South Korea continued to tighten supplies of premium grades that domestic refiners could not replace.

That mismatch pointed to a pick-up in flows in opposite directions: more Group I exports from Japan as the domestic surplus rose, and a rising need for premium-grade imports from other sources to cover for the slump in flows from Qatar.

The divergence was likely to persist even as overall Asia supply improved and regional prices came under pressure. Markets with sufficient total supply would still need to compete for higher-quality grades until Middle East premium-grade exports recover.