Global base oils – week of Feb 6: Price outlook

·        Base oils prices rebound versus diesel.

·        Asia Group II prices revert to small premium to diesel – likely insufficient to incentivize refiners to produce more base oils.

·        China’s domestic Group II N150 premium to Shandong diesel prices rises after falling for two months to end-January.

·        Major blenders in China announce price increases from mid-February in response to rising costs.

·        Europe base oils premium to diesel rebounds to highest since early December, from close to lowest in more than a year.

·        Europe’s Group III base oils price premium to crude/diesel falls in January to ten-month low, suggesting prices already reflect recovery in supply.

·        US posted price premium to heating oil holds close to highest in almost two months; heavy-grade premium stays high.

·        Base oils premium to diesel typically starts to trend higher from around middle of first quarter of new year in response to tighter supply-demand fundamentals.

·        Supply-demand fundamentals are tightening.

·        Falling prices often incentivize buyers to hold back, exacerbating oversupply.

·        Rising prices often incentivize sellers to hold back, exacerbating tightness.

·        Any repeat of that pattern would add to supply tightness.

·        G7 sets price cap of $100/bl for Russian oil products, including base oils, to third-party countries outside EU.

·        Price cap creates several options – to sell at or below the price cap, or to line up alternative non-G7/EU vessels and insurance.

·        Price cap is at small discount to current Russian base oils export prices.

·        Price cap is at substantial premium to G7’s price cap for Russian crude.

·        Steep premium provides incentive for Russian refiners to produce more diesel/base oils even if they sell at or slightly below the price cap.

·        Europe Group II prices maintain steep premium to fob Asia prices, even if much lower than in Q3 2022.

·        US Group II prices maintain steep premium to fob Asia prices.

·        Steep Europe/US premium in 2022 coincided with weaker-than-expected demand in Asia-Pacific.

·        Steep Europe/US premium early this year likely to coincide with steady improvement in Asia-Pacific demand, led by China.

·        Steep premium gives Asia-Pacific producers a wider range of outlets to move supplies to, facilitates removal of surplus supplies, increases leverage with buyers.

·        A stronger rebound in Asia-Pacific demand would incentivize regional buyers to seek to deter supplies from moving to more distant markets.

·        Europe Group II heavy-grade prices maintain steep premium to Group I prices.

·        Trend incentivizes European blenders to seek Group I heavy neutrals instead of Group II.

·        Europe Group II light-grade premium to Group I narrows over past two months, incentivizes blenders to use more Group II instead of Group I.

·        Europe Group II light-grade discount to Group III widens over past two months, incentivizes blenders to use more Group II.

·        Europe Group III premium to Group I stays lower than in Q4 2022, incentivizes blenders to use Group III.

·        Relative strength of Europe Group I light grades versus Group II/III base oils incentivizes blenders to use more premium grades.

·        Incentive to use Group II instead of Group I base oils even more stark in Asia-Pacific, where Group I and Group II prices are almost the same.

·        Relative weakness of Asia-Pacific Group II heavy grades versus Europe/US provides key arbitrage opportunity.

·        Domestic China Group II prices rise on tightening supply-demand fundamentals.

·        Supply-demand fundamentals likely to tighten further over coming weeks.

·        Rising domestic China Group II light-grade prices push premium to fob Asia-Pacific prices to widest level in more than two months.

·        Domestic China prices would likely need to maintain or widen further the premium to fob Asia prices to attract more Asia-Pacific supplies.

·        Trend raises prospect of tighter Asia-Pacific supplies for other markets over coming weeks.

·        Low refinery run rates and plant maintenance work would add to tighter availability.