Global base oils arb outlook: Week of 29 April

·        China’s domestic Group III base oils prices fall vs domestic Group II prices since Q2 2023, mirroring similar trend in US and Europe.

·        China’s domestic Group III price premium to Group II base oils falls by 20% since start of Q3 2023.

·        Drop in Group III premium lags the more-than 50% fall in Group III premium to Group II prices in US and in Europe.

·        China’s imports from overseas sources with Group III production rise in March 2024 for fourth time in five months from year-earlier levels.

·        Trend contrasts with sustained slowdown in US’ Group III base oils imports and more recent dip in Europe’s Group III base oils supply.

·        Diverging trends suggest that China remains structurally short of Group III base oils even after start-up of new base oils production capacity in recent years.

·        Recent price trends between different regions reflect such a dynamic.

·        China’s domestic Group III 4cSt premium to Europe and US Group III prices trends higher from Q2 2023; premium to US prices then surges in recent weeks.

·        Domestic Group III base oils premium rises even as China’s Group III production rises strongly from H2 2023.

·        Domestic Group III output stays low relative to Group II base oils output even with rise in production and after start-up of new Group III plants in recent years.

·        China’s Group III base oils output accounts for 4% of country’s total output in Q1 2024 and 3% in 2023 even after start-up of new capacity.

·        US market historically faced similar dynamic of low domestic Group III base oils production capacity.

·        US supplemented low domestic Group III base oils output with imports from sources like South Korea and Middle East.

·        Trend lifted imports as share of US supply to more than 50% of the total in 2023.

·        In Europe, Group III base oils accounted for more than 30% of its total supply during last two years.

·        Group III base oils’ share of total base oils output in China is low compared with supply in US and Europe.

·        Low share of total output suggests the country still requires additional volumes from overseas markets to meet domestic demand.

·        China’s base oils imports from markets with Group III production rise in March 2024 to highest in almost three years.

·        Firm demand and competitive prices versus other regions suggest the trend could continue until China’s domestic Group III output rises more sharply.