Global base oils - week of Nov 13: Price outlook - arbitrage

·        Prospect of fall in US base oils exports to Mexico increases importance of open arbitrage to other overseas outlets to limit year-end supply-build in US.

·        Prospect of drop in US flows to Mexico would coincide with seasonal slowdown in its domestic demand at year-end.

·        Prospect of weaker demand and rising supply increases importance of keeping shut the arbitrage to Americas from other markets like Asia.

·        US export base oils prices rose relative to other markets like Europe, Mideast Gulf and India during Q3 2023, ICIS data shows.

·        Trend suggests US supply-demand fundamentals were sufficiently balanced to avoid need to move surplus supplies to those markets.

·        Ongoing wave of US base oils exports to Mexico throughout Q3 2023 provide key outlet for surplus light-grade supplies especially, helping to sustain supply-demand balance.

·        Prospect of slowdown in US flows to Mexico increases importance of access to other markets instead.

·        US prices would need to move to wider discount to prices in those other markets to make arbitrage more feasible.

·        US Group II light-grade discount to Europe prices widens in 1H Nov 2023 to around $150/t, contrasts with discount of more than $400/t as recently as early Aug 2023.

·        US Group II light-grade prices flip to premium to cfr UAE prices from end-Sep 2023, from discount to UAE prices in first eight months of 2023.

·        US Group II light-grade prices flip to premium to cfr India prices since end-Aug 2023, from discount to India prices in 1H 2023.

·        Prices in those destination markets would need to rise, or US prices would need to fall, to make the arbitrage more feasible.

·        Light-grade prices in India fell in recent weeks partly in response to prospect of rise in US supply.

·        Trend suggests prices are more likely to fall in US market than prices rise in destination markets to make arbitrage more feasible.

·        Lower US prices would also make less feasible the arbitrage to move supplies from Europe or Asia to the Americas market.

·        Discount of Asia Group II light grades to US export prices widens to more than $100/t in recent weeks, from premium to US prices in Q2-Q3 2023.

·        Wider Asia price discount to US prices increases interest in working arbitrage to Americas.

·        Prospect of rise in surplus US supply would coincide with signs of relatively balanced supply in Asia-Pacific, especially compared with year-earlier levels.

·        Supply fundamentals in US and Asia suggest US market has more pressure than Asia to deter shipments from moving to the Americas from other regions like Asia.

·        Supply fundamentals suggest prices in Asia would have less need to respond to an adjustment in US prices that made US prices more competitive.