Global base oils - week of Dec 11: Price outlook - arbitrage

·        Asia’s base oils supply faces prospect of rising faster than demand on completion of plant maintenance, open arbitrage from US, and less workable arb to regional outlets, ICIS data shows.

·        Open arbitrage from US to markets like India sustains attraction of moving more supplies to the region.

·        Less workable arbitrage from Asia to outlets like China and India, as well as to Americas, curbs flows from the region.

·        Rising Chinese supply in Nov 2023 and expected restart of Group II plant in Taiwan in Dec 2023 add to regional supply.

·        Asia’s base oils producers face option of cutting output and/or cutting prices to limit rise in surplus supply.

·        Lower base oils output could limit downward pressure on regional prices and margins, adding to attraction of such a move.

·        More limited downward pressure on prices and margins could help to sustain an open arbitrage from the US.

·        Those flows would counter the benefit of lower regional output and put pressure on prices and margins in the medium term.

·        A sharp fall in US export prices in recent weeks already made that arbitrage even more attractive.

·        An open arbitrage in Q4 2023 followed a swathe of arbitrage shipments from US to India in first-half 2023.

·        Major plant maintenance in Asia in Q2 2023 and Q4 2023 cut supply during those periods.

·        The drop in supply to markets like India supported the flow of additional arbitrage shipments to the region.

·        The expected completion of plant maintenance in Asia by end-Q4 2023 raises the prospect of a rise in regional output and supply early next year.

·        A rise in supply makes less attractive the shipment of additional arbitrage cargoes to the region from markets like the US.

·        Lower fob Asia prices rather than lower output could be more effective at curbing such flows and a subsequent rise in regional supply.

·        Lower Asia prices could squeeze margins in the short term, cutting the attraction of such a move.

·        Lower Asia prices could help to support firmer margins in the medium-to-long term.

·        Lower prices would make more complicated the flow of arbitrage shipments to the region from markets like the US.

·        Lower prices would make less complicated the flow of arbitrage shipments to markets like China and India.

·        The arbitrage to those markets became less attractive in recent weeks after cfr India/NE Asia prices fell faster than fob Asia prices.

·        Squeezed margins caused by lower prices could also incentivize Asia’s refiners to cut production.

·        Lower production would be in response to lower prices rather than in response to rising supply.

·        Lower production and lower prices would support an open arbitrage to regional outlets.

·        Lower production and lower prices would make more complicated the arbitrage to those regional outlets from more distant sources like the US.

·        A slowdown in arbitrage shipments from sources like the US would in turn curb the size of a supply-build in Asia.