Global base oils arb outlook: Week of 20 Jan

·         Asia’s Group II base oils price discount narrows vs prices in northeast Asia, India, Europe and US in recent weeks.

·         Asia’s narrowing Group II price discount to overseas markets makes arbitrage harder to work.

·         Simultaneous narrowing of Asia price discount to prices in key overseas markets points to smaller-than-usual supply surplus in Asia for the time of year, supporting firmer prices relative to other regions.

·         Seasonal rise in lube demand and upcoming plant maintenance work likely to cut Asia’s base oils supply further later in Q1 2025.

·         Asia’s narrowing price discount to other markets could alternatively point to weaker import demand in those overseas markets.

·         Premium of CFR India Group II prices to FOB Asia prices falls in Jan 2025 to narrowest since start of Q4 2024.

·         Narrower premium complicates arbitrage for shipments from Asia, pointing to weaker demand, or sufficient supplies from other sources to cover India's requirements.

·         India’s base oils output rises to six-month high in Nov 2024 after sustained dip in output Q3 2024.

·         India’s base oils output set to extend gains this year as new production capacity comes online.

·         US base oils exports to India rebound to fourteen-month high in Nov 2024.

·         Rise in shipments, and prospect of additional shipments since then, provide buyers in India with another alternative supply source.

·         Premium of domestic China Group II N150 prices over FOB Asia prices narrows steadily from start of Q4 2024.

·         Narrower premium complicates arbitrage to move more shipments to China.

·         Less feasible arbitrage coincides with rise in China’s base oils output in Dec 2024 and throughout last year.

·         Premium of domestic Europe Group II N500 over FOB NE Asia prices falls in Jan 2025 to lowest since 2021.

·         Lower premium coincides with sustained rise in Europe’s regional Group II base oils output from Q2 2024.

·         Dynamic suggests those markets' weaker demand for supplies from Asia at least partly reflects impact of rising supply from other sources rather than just sharp drop in outright consumption.

·         Prospect of tighter surplus supply in Asia later in Q1 2025 curbs impact of less feasible arbitrage to those other markets.

·         Any improvement in supplies in Asia by contrast would increase the impact of less feasible arbitrage to other markets, putting pressure on the arbitrage to re-open.

·         Healthy availability of supplies in those other markets could conversely complicate a revival of arbitrage opportunities for shipments from Asia.

·         That scenario, and subsequent resolution of that scenario, is likely to materialize later in 2025.