Global base oils arb outlook: Week of 29 July

·        Asia’s Group I/II base oils price premium to gasoil holds firm so far in Q3 2024, well above year-earlier levels, even after slipping in June 2024.

·        Firm premium in Q2 2024 and so far in Q3 2024 points to strong supply-demand fundamentals, incentivizes refiners to maintain or raise base oils output.

·        Other price signals point to more muted demand.

·        FOB NE Asia Group II price discount narrows vs domestic China and CFR India prices in April-May 2024.

·        Price discount narrows amid weaker demand in India and China, complicating arbitrage shipments to those markets.

·        Discount stays narrow this month even after widening in June 2024.

·        Weaker demand and less feasible arbitrage to Asia’s largest markets incentivize refiners to cut base oils output or redirect supplies to other markets.

·        Incentive to cut base oils output contrasts with firm base oils premium to gasoil that incentivizes refiners to raise base oils output.

·        Base oils exports from key producers in Asia fall sharply in June 2024.

·        Simultaneous fall in exports from key producers cuts shipments to second-lowest level since May 2020, when pandemic-related restrictions slashed regional demand.

·        Exports fall in June 2024 even with no scheduled plant maintenance work.  

·        Fall in exports likely reflects drop in refinery production levels more than stock-building.

·        Drop in exports and output duly cushions impact of slowdown in demand, trimming surplus volumes carried into start of Q3 2024.

·        Smaller surplus limits pressure on refiners to adjust prices to open arbitrage to other markets.

·        Smaller surplus in turn helps to sustain firm base oils margins.

·        Drop in Asia’s base oils exports and output in June 2024 suggests refiners responded more to signs of slowdown in regional demand than to firm base oils margins.

·        Dynamic highlights importance of responding to appropriate price signal if the goal is to maintain supply-demand balance.