Global base oils arb outlook: Week of 20 May

·        US domestic Group II light-grade base oils price rises strongly relative to feedstock and diesel prices in recent weeks.

·        US domestic Group II light-grade base oils price rises relative to Group II light-grade export price, relative to domestic Group II heavy-grade price and relative to Group III prices in recent weeks.

·        US domestic Group II light-grade domestic base oils price rises relative to Europe and Singapore Group II prices in recent weeks.

·        Outperformance of US domestic Group II light-grade price relative to prices of other products and to prices in other regions points to tighter supply-demand fundamentals.

·        Muted US consumption suggests that tighter supply rather than stronger demand is the key factor driving strength in light-grade prices.

·        Tighter supply reflects various short-term rather than structural factors in response to weak demand and recent oversupply.

·        Outperformance of US domestic Group II light-grade price incentivizes refiners to halt or reverse many of those short-term factors.

·        Reversal of short-term factors would raise prospect of market reverting to oversupply.

·        US domestic Group II light-grade price premium to VGO rises to four-month high in May 2024.

·        Rising premium to VGO and heating oil, and falling heating oil premium to crude oil, incentivizes refiners to produce more Group II light grades rather than diesel.

·        Trend contrasts with unusually weak light-grade premium to VGO in early 2024 that incentivized refiners to produce more diesel, tightening light-grade supply.

·        Firmer US Group II light-grade price cuts its discount to Group II heavy-grade price to narrowest since Q3 2022.

·        Firmer light-grade price so far in Q2 2024 cushions impact of relatively weaker heavy-grade price, adds to incentivize for refiners to maintain or raise base oils output.

·        US domestic Group II light-grade premium to US light-grade export price rises through April 2024, contrasts with further drop in domestic heavy-grade premium to export price.

·        Wider domestic light-grade premium to export prices increases incentive for refiners to curb exports.

·        Any such slowdown in US shipments would follow surge in US exports to Mexico to record-high levels in Q1 2024.

·        Surge in US exports in Q1 2024, and especially shipments to markets like Mexico, added to tighter light-grade supply.

·        US domestic Group II light-grade discount to Europe Group II prices shrinks so far in Q2 2024 to narrowest in five months.

·        Smaller discount cuts attraction of moving more surplus supplies to Europe or other outlets like Israel.

·        US Group II light-grade price discount to US Group III 4cSt prices shrinks in Q2 2024 to narrowest since Q1 2020.

·        Narrower discount boosts incentive for refiners to produce more Group II rather than Group III base oils.

·        Any such move would contrast with US refiners’ recent moves to boost Group III base oils output partly in response to weak demand and prices for Group II base oils.

·        US refiners’ moves to produce Group III base oils added to tighter light-grade supply.

·        Firmer US Group II light-grade prices raise prospect of recovery in supply.

·        Any revival in light-grade supplies would need a reciprocal recovery in domestic demand to avoid refiners reverting to those short-term factors to limit supply.