Global base oils arb outlook: Week of 16 Dec

·         Group II heavy-grade base oils prices outperform most other grades in global market in 2024.

·         Group III 4cSt prices lag most other grades in global market in 2024.

·         Gap between US Group II heavy grades and Group III 4cSt base oils grows in 2024 to widest in at least eight years.

·         Outperformance of Group II heavy-grade prices reflects combination of steady-to-tight supply combined with rising demand in place of Group I heavy neutrals.

·         Price-weakness of Group III 4cSt base oils partly reflects impact of rising Group III base oils supply, especially in US and China.

·         Rising domestic supply curbs demand for overseas shipments in markets where lube consumption is already weak.

·         In US, unusually high base oils exports and firm US Group II light-grade prices are key trends in 2024.

·         High US base oils exports help to balance out weakness of domestic demand, curbing any build-up of surplus supplies so far this year.

·         Tight supply supports high US Group II light-grade prices, slashing their discount to US Group II heavy-grade prices and Group III 4cSt prices.

·         Tight supply and high US Group II light-grade prices curb flow of arbitrage shipments to markets like India since Q2 2024. 

·         In Europe, firm Group I base oils prices are key trend in 2024.

·         Firm Group I base oils prices reflect expectations of tighter supply following plant closure in Itay in H1 2024.

·         Firm Group I prices make less feasible the arbitrage to outlets like West Africa and Middle East even as outright prices fall in Nov-Dec 2024.

·         Firm Group I prices attract more base oils supplies from other markets to Europe.

·         Rise in imports and firm output support steady supply of Group I base oils, which remains the largest base oils grade in first nine months of 2024.

·         Steady Group I supply contrasts with dip in Group II and Group III base oils supply.

·         In Asia, lower base oils supply is key trend in 2024.

·         Base oils supply falls more than in other regions in 2024.

·         Lower supply contrasts with rise in Asia's lube demand in 2024.

·         Tighter supply-demand fundamentals cut surplus supply, support unusually firm base oils margins for products like Group I brightstock and Group II N500.

·         Tighter fundamentals attract regular flow of shipments from US and Europe to Asia, curb volume of arbitrage flows from Asia to Americas and Europe.

·         Same key trends in US, Europe and Asia likely to extend well into start of 2025.

·         New production capacity in Asia likely to disrupt those trends during 2025.

·         Even with smooth start-up of new capacity in Asia, global markets unlikely to see major impact until well into 2025.