Global base oils arb outlook: Week of 8 July

·        Seasonal slowdown in demand keeps pressure on outright base oils prices in key outlets like China, India and Middle East.

·        CFR India Group II price differential to FOB NE Asia prices stays narrow, reflecting the weaker demand in recent months.

·        But India price premium extends gradual recovery since early-June 2024.

·        Domestic China Group II price differential to FOB NE Asia prices stays unusually weak, reflecting the weak demand.

·        But price differential starts to rise in recent weeks from lowest since H2 2022.

·        Gap between base oils prices in FOB Asia markets and in destination markets stays narrow, keeping arbitrages hard to work.

·        But a reversion to a widening spread between FOB and CFR prices suggests that demand in those markets is starting to bottom out.

·        An extension of that trend over the coming weeks would start to make more feasible the arbitrage later in Q3 2024.

·        The timing would provide buyers in those markets with time to work down existing stocks.

·        The timing would coincide with a seasonal pick-up in demand at end-Q3/early Q4 2024, and with buyers’ need to lock in supplies beforehand.

·        CFR India Group II N150 price reverts to premium to FOB NE Asia price from end-June 2024.

·        Slide in CFR India N150 premium to FOB NE Asia price from end-March 2024 coincided with delivery of swathe of base oils into India during Q2 2024.

·        Shipments trigger surge in India’s surplus base oils supply, curbing subsequent demand.

·        Arbitrage to India stays hard to work even as CFR India N150 premium to FOB NE Asia price starts to widen.

·        An extension of this widening trend over the coming weeks would make the arbitrage more feasible and trigger a subsequent improvement in demand.

·        China’s domestic Group II base oils prices hold firm vs Shandong diesel prices in recent weeks.

·        Steady price premium to diesel contrasts with sharp fall in FOB NE Asia Group II premium to gasoil in June and early-July 2024.

·        China’s domestic Group II light-grade price premium to FOB NE Asia Group II prices starts to widen from late-May 2024

·        Premium had previously narrowed steadily from Jan 2024, incentivizing regional refiners to move more shipments to other markets instead of China.

·        Steady Group II price premium to diesel and widening premium to FOB NE Asia prices points to change in China’s fundamentals compared with Asia market.

·        Any extension of the trend could start to boost the attraction of moving more shipments to China.

·        An extension of these trends over the coming weeks in China and India would make the arbitrage more feasible.

·        Any opening of the arbitrage later in Q3 2024 would coincide with preparations for and the start of plant maintenance work in South Korea at end-Q3 2024.

·        A simultaneous opening of the arbitrage to several key markets would boost demand at the same time as plant maintenance trims supply.