Global base oils arb outlook: Week of 23 Sept

·        Europe’s Group II base oils prices rise in recent weeks vs Europe Group I prices and vs Asia/US Group II prices.

·        Europe’s Group II base oils price strength vs Group I and vs other regions points to tighter supply and stronger demand fundamentals.

·        Europe’s Group II base oils price differential improves even as supply extends recovery vs first four months of 2024.

·        Recent price strength, despite higher supply, suggests demand may be the key differentiator.

·        Europe’s tighter Group II supply fundamentals in early 2024 incentivized blenders to trim Group II requirements and boost consumption of other grades like Group I base oils.

·        Stronger demand for Group I base oils supported prices that rose strongly in Q2 2024 vs Group II base oils and vs Group I prices in other regions.

·        Europe’s higher Group I prices support steadier supply in H1 2024, helping to cover stronger demand.

·        Recovery in Europe's Group II supply raises prospect of drop in demand for Group I base oils from blenders that turned to the grade as an alternative to Group II earlier in the year.

·        Drop in requirements for Group I base oils would also curb need for additional Group I supplies from other markets.

·        Europe’s Group I base oils prices trend lower vs Group II base oils and vs prices in other regions in recent weeks, pointing to weaker supply-demand fundamentals compared with H1 2024.

·        But volatility of Group II base oils supply this year highlights Europe’s ongoing reliance on a single regional source for most of its supplies of the premium-grade base oils.

·        Volatility of Group II base oils supply contrasts with Europe’s steady-to-firm Group I base oils supply, despite recent plant shutdowns and closures in the region.

·        Ongoing volatility of Group II base oils supply and relative stability of Europe’s Group I base oils supply sustains attraction for blenders to maintain option of using Group I base oils.

·        That dynamic is likely to provide underlying demand and price-support for Group I base oils.

·        That underlying demand is likely to continue until blenders have more stable supply and more regional supply options for premium-grade base oils.