Global base oils arb outlook: Week of 27 May

·        Global base oils values mostly extend gains versus feedstock and diesel prices as outright prices trend higher and crude and diesel prices stay lower.

·        Outright prices rise partly in response to tighter supply compared with Q1 2024.

·        Rising base oils prices and rising base oils premium to feedstock/diesel prices incentivize refiners to boost output.

·        Prices in destination markets like China, India and Middle East lag rise in prices in FOB markets like Asia, Europe and US.

·        Prices in destination markets lag rise in FOB prices amid signs of healthy availability of supply and ahead of seasonal slowdown in demand during summer months.

·        Disconnect between rising FOB prices and steady-to-lower CFR prices complicates arbitrage opportunities to growing number of markets.

·        Disconnect set to trigger drop in supplies to destination markets.

·        Trend leaves sellers in FOB markets with choice of maintaining prices by managing supply or maintaining supply by managing prices.

·        Asia-Pacific Group II price premium to regional gasoil prices rises in May 2024 to highest in at least a year.

·        Rebounding base oils premium incentivizes refiners to maintain or raise base oils output.

·        Group II prices in destination markets like China and India increasingly lag firmer FOB Asia cargo prices.

·        Group II prices in destination markets lag FOB prices amid signs of healthy availability of supply in destination markets.

·        India’s base oils imports rise to five-month high in April 2024, with supplies including wave of less regular shipments from sources like China, Indonesia and Turkey.

·        Healthy availability of supply and prospect of seasonal dip in demand during summer months cap upward pressure on CFR prices in destination markets.

·        Gap between FOB and CFR prices narrows in response, complicating arbitrage.

·        Mexico’s demand for Group II light-grade base oils from the US often shows signs of rising when US Group II prices dip to low levels relative to VGO and heating oil.

·        Surge in US base oil/lube exports to Mexico in Q1 2024 coincided with unusually weak US Group II prices relative to VGO and heating oil.

·        US Group II light-grade prices rebound relative to VGO and heating oil in Q2 2024.

·        Rebounding premium to VGO/heating oil raises prospect of curbing strength of Mexico’s demand for Group II light grades in Q2 2024.

·        Firm base oils margins and signs of more muted demand in key outlets raise prospect of several scenarios.

·        These range from buyers running tight on supplies at one extreme to refiners facing a growing surplus at the other.

·        A structurally oversupplied global base oils market suggests that the onus is more on refiners to avoid a growing surplus.

·        Refinery run-cuts could help to avoid such a scenario.

·        High base oils margins could deter such moves.

·        Either way, any moves to seek to simultaneously maintain margins and supply at current levels would send a signal to buyers that they would respond to accordingly.