Global base oils arb outlook: Week of 10 June

·        Asia’s Group II base oils price discount weakens or flips to premium versus prices in regular outlets like China and India.

·        Less feasible arbitrage to key outlets coincides with seasonal slowdown in demand in those markets, raising prospect of rise in surplus supplies.

·        Rise in surplus supplies would put pressure on Asia refiners to cut output or prices to limit supply-build.

·        Pressure to cut prices or output may be more limited for Group II heavy grades because of signs of less surplus supply and firmer demand.

·        Taiwan’s Group II base oils exports stay lower than usual in April and May 2024.

·        Lower exports magnify impact of heavy-grades’ lower share of those exports.

·        More limited supply from markets like Taiwan contrasts with steady-to-firm demand for Group II heavy grades both within and outside Asia-Pacific region.

·        In China, domestic Group II heavy-grade premium to light grades extends rise in June 2024 to highest in more than two years.

·        Higher heavy-grade premium points to tighter fundamentals, facilitates arbitrage flows to that market.

·        Structurally, tighter supplies of Group I SN 500 boosts blenders’ incentivize to use more Group II heavy grades in their lubricants formulations, especially for marine lubricants.

·        Regionally, India’s imports of Group II heavy grades extend steady rise in 2024.

·        Pakistan’s base oils imports are low compared with India.

·        Pakistan’s imports of Group II heavy grades account for more than 50% of its total imports in 2023 and in Q1 2024.

·        Pakistan's larger share of heavy-grade imports magnify impact of its demand for heavy grades compared with markets like India.

·        Pakistan’s Group II heavy-grade imports rise more than 30% in Q1 2024 from year-earlier levels, outpacing rise in country’s total imports.

·        Outside Asia, rising US base oils prices make more feasible the arbitrage to move Group II heavy-grade base oils to outlets in Latin America.

·        Any arbitrage shipments to those markets would cut further the volume of supplies in Asia-Pacific region.

·        Tighter heavy-grade supply and steady-to-firm demand would curb size and speed of any supply-build.

·        A smaller or slower supply-build of heavy grades would ease extent of any adjustment to prices or output in response.