Global base oils – week of March 13: Price outlook

·        Europe/Asia base oils prices rise relative to lower outright diesel prices.

·        Asia Group II prices maintain premium to diesel since early February, vs steep discount to diesel in January.

·        Europe Group II premium to diesel holds close to lowest in a year.

·        Base oil values get boost more from lower crude/gasoil prices than from rise in outright prices.

·        Muted rise in outright prices contrasts with typical strong rise in prices at end of first quarter of each year when supply-demand fundamentals tighten.

·        India’s retail diesel premium to regional light-grade prices edges lower; trend could start to deter imports of very light grades.

·        China’s domestic Group II light-grade premium to Shandong diesel prices holds firm, well up from January lows, still down from peak levels in 2H November.

·        China’s domestic base oils prices/premium to fob Asia prices hold in narrow range, differ markedly from wide-open arbitrage to China in 1H 2020 and surging heavy-grade prices in 1H 2021.

·        Globally, buyers’ expectations that prices will hold in a narrow range or rise only slowly curb urgency to lock in supplies.

·        European price weakness at end-2022 and through Q1 2023 suggests change in typical procurement trends as buyers hold off replenishing stocks or procure smaller volumes more regularly.

·        Change in procurement trends magnifies demand weakness.

·        A change in procurement trends would incentivize producers to adjust their production/sales plans accordingly to maintain steady supply/avoid supply-build.

·        Surge in US base oils/lube stocks at end-2022 highlight impact of prices that complicate removal of surplus supplies.

·        Surge in US base oils exports in January adds to supply and price-pressure in short term.

·        More balanced supplies following rise in exports highlight benefit of prices that facilitate removal of surplus supplies and avoidance of stock-build.

·        February-loading shipment of Group II heavy grades from Taiwan to northwest Europe coincided with steep Europe Group II heavy-grade premium to fob Asia prices.

·        Europe Group II premium to fob Asia prices narrows by more than $200/t since early February – making arbitrage less attractive.

·        Europe Group II light-grade premium to fob Asia prices narrows more than $250/t since early February, making arbitrage even less feasible.

·        Weaker Europe Group II prices narrow premium to US prices, complicating arbitrage, especially for heavy grades.

·        Stronger regional Group II demand in Asia/China reduces impact of less workable arbitrage to Europe.

·        Any sign of weaker-than-expected Group II demand in Asia/China would increase importance of open arbitrage to Europe.

·        Asia Group II heavy-grade discount to US prices stays wide – sustaining arbitrage for moving that product to Americas.

·        Europe’s Group I prices strengthen relative to fob Asia prices – reflecting firming prices/fundamentals in Europe.

·        Firmer Europe prices make less feasible the arbitrage to move surplus supplies to markets like Mideast Gulf or Latin America.

·        Firmer Europe Group I prices could boost attraction of moving Russian supplies to Latin America.

·        Europe Group II price premium to Group I prices falls sharply in recent weeks to narrowest since first-half 2021.

·        Narrow premium boosts attraction for blenders to use Group II instead of Group I.

·        Steep premium of Europe Group II prices to Group I since 2021 could deter blenders that are wary that the currently-narrow premium will widen again.

·        Narrow Group II premium to Group I could attract blenders that have flexibility to switch with relative ease between Group I and Group II base oils.

·        Europe Group II heavy grades maintain steep premium to light grades, contrasting with narrow Group I light-heavy price spread.

·        Wider Group II light-heavy price spread could incentivize blenders to stick with Group I heavy neutrals.

·        Europe Group III premium to Group I prices widens to highest in more than four months.

·        Europe Group III premium to Group II prices widens to highest in more than two years.

·        Wide Group III premium to other grades incentivizes blenders to switch to other grades where possible.

·        Asia Group II N500 premium to N150 stays narrow – curbing any additional heavy-grades support for margins.

·        Asia Group II premium to Group I widens, especially for heavy grades, to highest in more than three months.

·        Asia Group II premium to Group I remains relatively narrow – at levels that are unlikely to encourage a switch to Group I.

·        Fob Asia Group I bright stock discount to domestic Chinese prices holds steady and narrow – making arbitrage hard to work unless domestic Chinese prices rise or fob Asia prices fall.

·        Fob Asia Group I bright stock prices are less likely to fall.

·        Fob Asia Group II discount to domestic Chinese prices narrows, making arbitrage hard to work for light and heavy grades.

·        Limited arbitrage opportunities suggest supply in China is sufficient to cover demand – despite low domestic base oils production in China.