Global base oils arb outlook: Week of 14 Oct

·        US Group II base oils export prices fall in recent weeks as supply-demand tightness eases.

·        US Group II prices maintain wide premium to CFR India prices even with steep fall in US prices in recent weeks.

·        Ongoing US base oils premium to CFR India prices suggests US supply-demand fundamentals remain at levels that curb urgency to open arbitrage to move surplus supplies to that market for now.

·        Persistence of US base oils premium to CFR India prices suggests that any subsequent pick-up in arbitrage shipments from US are unlikely to reach outlets like India or Middle East at least for several more months.

·        A lack of or delay in availability of any such shipments would also postpone any downward price pressure that the extra supplies generated in those destination markets.

·        A lack of or delay in availability of any such shipments would also force buyers that required additional volumes in those markets to seek other sources instead.

·        US Group II light-grade prices hold firm relative to heavy-grade prices and to Group III prices even after recent price-drop.

·        US Group II price-strength points to relatively firm supply-demand fundamentals, especially compared with those other products.

·        US base oils and lube exports hold firm in July-Aug 2024 even with high US base oils export prices.

·        Recent exports include regular shipments to markets like West Africa, India and Pakistan.

·        Firm exports limit size of supply-build in US during Q3 2024 and size of surplus to clear at start of Q4 2024.

·        Planned and unexpected plant maintenance in US at start of Q4 2024 slows further any supply-build.

·        Prospect of lower-than-expected supply-build in US coincides with tightening supply-surplus in Asia in Aug 2024.

·        Surplus in Asia likely tightened even more in Sept 2024 as seasonal revival in demand coincided with regional plant maintenance work.

·        Asia’s tighter fundamentals, and plant maintenance extending into start of Q4 2024, boost incentive for regional buyers to line up supplies from alternative sources.

·        One such alternative source is US.

·        Moves to cut US stocks at start of Q4 2024, following peak hurricane period, raise expectations of growing volume of surplus supplies to clear from that market.

·        A smaller supply surplus in US would instead leave any such volumes lagging expectations.

·        Any volumes that lag expectations would leave buyers in markets like Asia needing to target other sources or face tighter-than-expected supply at least until end-Q4 2024.