Global base oils arb outlook: Week of March 25

·        China’s domestic Group II prices weaken versus competing fuel prices and versus other regions over past month.

·        China’s base oils prices weaken at a time of year when a seasonal rise in lube consumption typically boosts base oils demand.

·        China’s base oils prices weakness follows a sharp rise in supplies at the start of the year that precedes a round of Group I and Group II plant maintenance work in the country in March 2024.

·        China’s price weakness points to more-than-enough supplies and muted demand for those supplies.

·        China’s domestic Group II light and heavy-grade prices mostly weaken versus Shandong diesel prices throughout March 2024.

·        Price weakness contrasts with surging base oils premium to diesel prices during same period last year.

·        Lower base oils premium to diesel points to weak supply-demand fundamentals that limit sellers’ leverage to raise prices.

·        China’s domestic Group II price for imported base oils strengthens slightly versus Group II prices for domestic supplies in Feb 2024, before weakening in March 2024.

·        Price premium for imported base oils rises only slightly even with slide in Taiwan’s exports to China in Feb 2024.

·        Muted price response suggests supplies are more than sufficient even with drop in shipments from Taiwan.

·        China’s net base oils supply, or domestic production and net imports, rises by more than 30pc year-on-year to close to 1.20mn t in first two months of 2024.

·        Rising supply and muted demand cuts requirements for additional overseas supplies.

·        China’s domestic Group II light and heavy-grade price premium to fob Asia prices trends lower in recent weeks.

·        Shrinking premium reduces attraction of lining up arbitrage shipments from Asia to China.

·        Less feasible arbitrage contrasts with rising CFR India Group II price premium to FOB Asia prices through most of March 2024.

·        Arbitrage to move Group I bright stock to China stays feasible.

·        But premium of CFR NE Asia Group I bright stock price over CFR India bright stock narrows steadily since mid-Jan 2024.

·        Trend points to rising competition and prices from India for bright stock supplies.

·        Price trends point to more muted buying interest in China and firmer demand in other markets.

·        China’s more muted demand and firmer price trends in other parts of Asia incentivize region’s refiners to continue to focus on other markets rather than China.

·        China’s more muted demand only likely to have a larger impact on regional market if country’s exports were to rise sharply.

·        So far, that hasn’t happened.