Americas/EMEA base oils - week of Feb 5: Demand outlook

·        Americas’ base oils demand likely to remain more muted as buyers face little urgency to replenish stocks.

·        Wide gap between US domestic spot and posted prices adds to incentive for domestic buyers to hold back.

·        Demand likely to get more support when buyers deem prices are likely to hold firm or rise and if concerns rise about availability of supply.

·        Narrowing gap between US domestic and export prices could be early indication that supply-demand fundamentals are starting to change.

·        US’ competitive export prices maintain arbitrage opportunities to multiple overseas markets.

·        Trend extends pattern that was instrumental in limiting supply-build during Q4 2023.

·        US’ November base oils/lube demand falls to four-month low as surge in exports cushions impact of slump in domestic consumption.

·        Base oils exports account for more than 70pc of US demand in November and more than 50pc every month since March 2023.

·        Exports exceeded 50pc of demand just two times in 2022.

·        Trend highlights importance of overseas outlets as key growth markets for US supplies.

·        Trend highlights importance of maintaining steady flows to those markets to avoid large build-up of surplus supplies in domestic market.

·        Weakness of domestic US demand in Nov 2023 suggests blenders may have brought forward procurement plans before round of lubricant-price increases came into effect from Oct 2023.

·        Subsequent fall in base oil posted prices in Dec 2023, and expectations of such a move, added to incentive for blenders to hold back in Nov 2023.

·        Like other regions, Latin America’s lube demand likely to peak in March before trending lower in Q2 2024.

·        Pace of drop in demand in Q2 2024 from Q1 2024 likely to be slower than in Europe and Asia.

·        Trend could boost attraction of targeting Latin America with more surplus base oils supplies in Q2 2024.

·        Argentina’s December lube demand falls for fifth time in six months as economic activity slows sharply

·        Falling lube demand cuts country’s base oils requirements.

·        Argentina’s steep currency depreciation increases costs of overseas base oils supplies.

·        Trend likely to boost requirements for domestic base oils supplies, cut demand for overseas supplies.

·        Any such slowdown in demand for overseas base oils supplies would have largest impact on the US.

·        US suppliers can maintain firmer volumes to Latin America by boosting share of smaller market.

·        Argentina’s base oils imports from South Korea rebound in Q4 2023 despite less feasible arbitrage and competitive US prices.

·        Any extension of that trend would compound slowdown in demand for US supplies.

·        That trend is less likely to continue in early 2024 as more South Korean supplies cover seasonal rise in demand in markets like China and southeast Asia.

·        Brazil’s base oils demand for overseas supplies likely to fall after surge in imports extends through to end-2023.

·        Europe’s lube demand set to rise steadily throughout Q1 2024 before easing in Q2 2024.

·        Blenders’ lower inventories likely to magnify impact of seasonal pick-up in demand, even if it remains weaker than previously.

·        Blenders’ higher stocks in early 2023 and moves to cut inventories dampened impact of seasonal rise in demand early last year.

·        Blenders likely to maintain lower inventories even as they replenish stocks amid ongoing signs of muted finished lube demand.

·        Blenders’ expectations that they can secure supplies as and when required adds to preference to maintain lower stocks.

·        Demand for Europe’s surplus Group I base oils supplies could get boost from open arbitrage to Asia, where supply is tight.

·        Europe’s base oils exports to key markets in Africa fall in late 2023 more because of drop in supply than because of unworkable arbitrage opportunities.

·        Trend highlights structural drop in Europe’s surplus base oils supply, boosts incentive for US refiners to target Africa with more supplies.

·        Pick-up in shipments from US to West/North Africa in recent weeks points to such a move.

·        Rebound in shipments to Egypt from Europe/US in recent weeks follows sharp slowdown in flows to the country at end-2023.