Global base oils – week of March 20: Price outlook

·        Asia Group II base oil price premium to diesel rebounds by more than $220/t since early February to highest since last August.

·        Europe Group I base oil price premium to diesel rebounds by more than $250/t since January to highest since end-September.

·        Europe Group II base oils price premium to diesel rises from multi-year low in early March, still low vs past year.

·        Rebounding base oils premium to crude/diesel suggests firmer supply-demand fundamentals.

·        Rebounding base oils premium to crude/diesel suggests supply is tighter, incentivises refiners to produce more base oils.

·        Supply-demand fundamentals remain weaker than usual for time of year.

·        Rebounding base oils premium raises prospect of triggering rise in supply that outweighs demand.

·        China’s domestic light-grade Group II premium to Shandong diesel rises to highest in almost four months.

·        Rising base oils premium incentivizes China’s refiners to raise base oils output that has been unusually low over past year.

·        Europe’s Group II premium to fob Asia prices stays narrower, likely deterring additional arbitrage flows from Asia.

·        Europe’s Group II premium to US prices stays narrower, complicating flow of shipments from US.

·        Europe’s domestic/export Group I premium to fob Asia prices steadies at higher levels than Jan-Feb 2023, lower levels than 2H 2022 – pointing to more balanced supply/less urgency to move arbitrage shipments from Europe.

·        Europe’s steep Group III premium to Group I/II base oils reflects supply tightness at start of year.

·        Europe Group III premium to Group I/II could face pressure on signs of easing supply tightness.

·        Europe Group III premium could face pressure as price incentivizes blenders to switch to Group I/Group II/PAO.

·        Narrower Europe Group II premium to Group I could incentivize blenders to switch to Group II.

·        Narrowing Group II premium to Group I has precedent – Asia Group II prices were previously at steep premium to Group I. Asia Group II premium is now consistently much narrower.

·        Fob Asia Group II premium to Group I stays wider than at start of year, but narrower than usual.

·        Narrow premium incentivizes blenders to stick with Group II.

·        Fob Asia Group II heavy-grade prices maintain steep discount to US prices, sustain feasibility of moving arbitrage shipments to Americas.

·        Fob Asia Group II discount to domestic Chinese prices holds in narrow range – wider than pre-Oct 2022 levels, narrower than Nov-Dec 2022 levels.

·        Lack of steep rise in domestic Chinese price premium to fob Asia prices suggests supply-demand fundamentals remain balanced.

·        Domestic Chinese Group II prices hold relatively steady even as domestic demand rises, and as South Korean base oils exports to the country surge.

·        Trend points to stronger but not surging Chinese demand for overseas supplies.

·        Trend points to plentiful South Korean supply, curbing leverage to target higher prices.