Global base oils arb outlook: Week of 22 April

·        US Group III base oils prices slide in recent weeks, contrasting with firmer Group II domestic and export prices.

·        Falling US Group III base oils prices contrast with steady-to-firm Group III prices in Europe and Asia.

·        Diverging price trends point to persistent oversupply of Group III base oils in US even with sustained slide in base oil imports.

·        Diverging price trends raise prospect of boosting domestic demand for Group III base oils at the expense of Group II base oils and of imported Group III base oils.

·        Falling US Group III prices cut their premium to Group II light-grade prices to narrowest since H1 2021.

·        Narrower premium boosts incentive for blenders to consume more Group III base oils instead of Group II base oils.

·        Falling US Group III prices flip their premium to Europe Group III prices to a discount for the first time since end-Aug 2023.

·        US Group III price discount to Europe Group III prices boosts attraction of moving more overseas Group III supplies to Europe rather than to the US.

·        US Group III base oils prices fall even as US domestic supply, or domestic output and imports less exports, shows a similar trend to domestic demand in recent years.

·        US base oils imports account for growing share of that domestic supply.

·        Base oil imports’ surging share of US domestic supply points to relatively firm domestic demand for Group III base oils even as US’ total base oils and lube demand falls.

·        Dynamic boosts attraction for domestic refiners to increase their share of domestic supply that faces relatively firm demand.

·        A consequence of US refiners targeting the domestic Group III base oils market would be a fall in demand for Group III supplies from overseas markets.

·        Another consequence would be a drop in Group II base oils output.

·        Rise in US base oils exports to record-high in 2023 points to slowing domestic demand for Group II base oils.

·        Slowing demand adds to attraction for domestic refiners to increase Group III base oils output and to cut Group II base oils output.

·        Cost of strategy is rising domestic Group III base oils supply and increasingly squeezed Group III base oils margins.

·        Benefit of strategy is lower total output, lower imports, a rising share of domestic supply, and smaller Group II surplus for export markets.

·        Group III base oil premium to US Group II export prices also narrows sharply in recent weeks.

·        But a still-wide premium may be more attractive than US Group II export supplies that frequently require steep discounts to attract overseas buyers.