Global base oils - week of Jan 16: Supply outlook

·        Global diesel prices keep pace with rising crude oil, maintain firm premium to crude.

·        Strong diesel premium to crude provides refiners with attractive alternative to base oils production.

·        India’s retail diesel premium holds firm vs crude, especially vs discounted crude.

·        China Shandong province diesel premium to crude holds in narrower range in recent weeks after sharp fall in December; still firm, especially vs discounted crude.

·        China’s diesel demand stays weak as cold weather, lunar new year holidays curb industrial activity.

·        Prospect of further rise in Chinese diesel production and exports could put pressure on diesel crack.

·        US refinery run rates recover last week after freezing weather triggers slump in output in late-December. Swift recovery suggests limited impact of cold weather.

·        Europe distillate stocks stay lower than usual in Q4 2022 ahead of ban on imports of diesel from Russia from early February.

·        Low base oils supply in Americas in Q4 2022 balances out weaker demand, leaves fundamentals relatively balanced at start of this year.

·        Low US base oils production in Q4 curbs export volumes.

·        Low November US base oils exports suggest limited surplus supplies to clear at end-2022, more balanced supply at start of 2023.

·        US base oils plant maintenance starts in January, curbing any supply-build.

·        US Group III base oils imports likely to recover in early 2023 after slowdown in shipments from Mideast Gulf and South Korea in Q4 2022.

·        Lack of risk-management tools magnifies impact of even small volume of surplus supplies as difficulty to manage risk curbs buyers’ willingness to lock in volumes.

·        Price pressure in Europe market reflects that dynamic.

·        Europe could face sudden supply shortage if surplus availability is smaller than expected or clears fast as demand picks up.

·        Any supply shortage could deepen if regional producers cut run-rates or overseas producers cut shipments to the region.

·        Such moves would compound drop in supply as EU sanctions on imports of base oils of Russian origin come into effect in early February.

·        Complications of sustaining Russian base oil exports volumes could prompt country’s refiners to cut run rates.

·        Europe’s Group III base oils availability likely to improve after sharp supply squeeze in Q4 2022.

·        Expected revival in Chinese demand over coming weeks likely to highlight lower regional stocks of products like bright stock, boosting competition for limited supplies.

·        Slump in Taiwan’s December base oils exports adds to signs of more balanced regional supply at start of this year.

·        Surge in share of Taiwan’s exports to China in December illustrate likely change in trade flows over coming months as Chinese demand revives.

·        Key outlets for Taiwan supplies in 2022, like India, Mideast Gulf and Latin America, likely to see slowdown in arbitrage flows this year, after surge in shipments last year.

·        Slide in Thailand and Indonesia’s Group I base oils exports in Q4 2022 curb moves to build stocks ahead of seasonal pick-up in demand in first few months of 2023.

·        Slowdown in base oils exports likely extends to South Korea’s December shipments amid low run-rates, weak margins.

·        Low exports curb further regional buyers’ opportunity to replenish stocks.

·        South Korea’s refiners incentivized to maintain low run-rates in response to still-weak margins.

·        Low production would continue to limit export volumes, further curbing supply-build ahead of seasonal rise in regional demand.

·        Slump in India’s very-light grade base oils imports in December highlights impact of lower refinery production and smaller supply surplus.

·        Singapore four-week average base oils exports to India extend fall to lowest in more than two months.

·        Chinese refiners with lower-priced feedstock of Russian origin face widespread arbitrage opportunities selling base oils cargoes at competitive prices into markets like southeast Asia and India.