Global base oils arb outlook: Week of 5 Aug

·        Europe’s Group III 4cSt base oils premium to Group II light grades slides in first seven months of the year to lowest since Q3 2022.

·        Group III 4cSt base oils premium to Group II light grades shows similar downward trend in US and Asia.

·        Narrower Group III base oils premium to Group II base oils has a similar effect on demand in all markets by incentivizing blenders to use more Group III base oils in their formulations.

·        Narrower Group III base oils premium to Group II base oils has differing effect on supply in the various markets, and differing impact on prices.

·        India’s Group III 4cSt/8cSt base oils imports rise in June from year-earlier levels even as country’s total imports and Group II base oils imports fall.

·        Rise in Group III base oils imports coincides with Group III prices that fall to increasingly narrow differential to Group II prices so far this year.

·        Narrower price differential boosts attraction of using Group III base oils, cuts demand for Group II base oils.

·        Lower demand for Group II base oils frees up more supplies, adding to pressure on regional Group II base oils prices.

·        Europe faces a similar dynamic, where healthy supply and competitive Group III prices incentivize blenders to use more of those supplies instead of Group II base oils.

·        Like Asia, any such switch frees up more Group II supplies.

·        The dynamic complicates moves by Group II suppliers to adjust prices that would trim even more their discount to Group III prices.

·        The US faces a similar price and demand dynamic, with competitive Group III prices relative to Group II incentivizing blenders to use more Group III base oils.

·        The impact of these trends on US supply is different.

·        Healthy Group III base oils supply in US partly reflects a rise in domestic Group III production at the expense of Group II base oils output, rather than in addition to Group II output, unlike other markets.

·        Healthy supply and consumption of Group III base oils in turn triggers fall in supply of Group II base oils, unlike other markets.

·        US’ narrower Group III premium to Group II base oils reflects both the weakness of Group III prices and the relative strength of Group II base oils prices, unlike other markets.

·        A repeat of that dynamic in other markets would require a rise in Group III production at the expense of Group II production.

·        An expected rise in Group III production in Asia over the coming year is instead in addition to a planned rise in Group II production.

·        The trend suggests that the dynamic of firmer Group II prices in response to rising Group III supply is unlikely to extend beyond the US market.