Global base oils arb outlook: Week of 9 Sept

·        Asia’s Group II base oils prices maintain wide or widening discount to prices in US and Europe.

·        Wide discount facilitates arbitrage flows, helping to clear surplus supplies from Asia in recent months.

·        Asia market began Q3 2024 with smaller-than-usual supply surplus, especially vs same time a year earlier.

·        Asia’s base oils supply surplus could also end Q3 2024 with lower volumes than usual.

·        Smaller surplus could then extend into Q4 2024 because of ongoing and upcoming plant shutdowns.

·        Signs of stock-building precede scheduled start of Group II plant shutdown in South Korea in mid-Sept 2024 for maintenance work.

·        Plant maintenance in South Korea set to coincide with unexpected shutdown of major base oils unit in Japan from start of Q3 2024 following fire in early-July 2024.

·        Japan’s base oils exports already slump this year following closure of Group I unit in late-2023.

·        Plant maintenance in South Korea set to coincide with planned closure of major Group I plant in China in Oct 2024.

·        Plant closure could boost China’s demand for Group I supplies from regional sources.

·        US base oils supply also tightened heading into start of Q3 2024.

·        US supply tightened because of plant maintenance work and as stock-building boosted demand.

·        Higher US prices and closed arbitrage to overseas markets reflect the tighter supply.

·        US base oils supply tightness likely to ease over coming months as distributors work down stocks and demand ebbs ahead of/during winter.

·        Europe market entered Q3 2024 with healthy supply of Group I base oils and improving supply of premium-grade base oils.

·        Improving supply coincides with still-shrinking regional lube consumption, then seasonal slowdown in demand in Q3 2024.

·        Healthy base oils supply likely to leave region with sufficient availability to cover demand over coming months.

·        Changing supply-demand trends in Asia and US and sufficient supply in Europe in coming months suggest open arbitrage from Asia may need to close in response to tighter supply in that market.

·        Supply-demand trends suggest closed arbitrage from US may need to open to clear surplus supply from that market.

·        Such a scenario would require Asia’s base oils prices to outperform US prices especially over the coming weeks and months.

·        Such a scenario would limit the impact on Asia prices of any adjustment in US prices that help to facilitate the removal of surplus supplies from the US.