Global base oils - week of Dec 18: Price outlook - arbitrage

·        Europe’s Group II base oils prices rise relative to Group I and Group III prices in 2023 even as supply rises, ICIS data shows.

·        Rise in Group II prices versus Group I and Group III prices coincides with ongoing slide in regional lube demand.

·        Trend suggests Group II base oils are covering a growing share of market demand as well as supply.

·        Europe’s Group II base oils supply rises more than 10pc in first nine months of 2023.

·        Group I base oils supply falls by 6pc in first nine months of 2023; Group III supply rises by 5pc.

·        Europe’s Group II base oils supply accounts for 32pc of regional market in first nine months of 2023, up from 30pc share in 2022.

·        Europe’s Group II market share almost catches up with Group III, contrasts with shrinking Group I market share.

·        Europe’s total base oils supply holds steady in Jan-Sep 2023 even as regional lube demand falls.

·        Steady supply and lower demand coincide with drop in Europe’s base oils values vs feedstock prices in 2023 vs 2022.

·        Europe’s Group III prices fall the most vs feedstock prices in 2023 vs 2022.

·        Europe’s Group II prices fall the least vs feedstock prices in 2023 vs 2022.

·        Trend points to larger supply-demand imbalance for Group III base oils in 2023, and smaller supply-demand imbalance for Group II base oils.

·        Similar supply of Group II and Group III base oils in Jan-Sep 2023 and shrinking total demand suggest Group II base oils are covering a larger share of the shrinking demand.

·        Its growing share of shrinking demand partly reflects blenders switching away from Group I base oils because of falling supply and stricter lube specification requirements.

·        Its growing share of shrinking demand suggests blenders are also switching away from Group III base oils despite plentiful supply and their ability to meet stricter lube specification requirements.

·        That trend could be linked to shrinking supply of Group I base oils, and blenders’ previous use of a combination of Group I and Group III base oils instead of Group II in their lubricant formulations.

·        Those structural changes are set to continue, raising the prospect of extending underlying support for Group II base oils demand into 2024. 

·        Prices could be one factor that changes next year’s supply-demand dynamics.

·        The premium of Group III (low) prices over Group II prices averaged more than $690/t in 2023, up from close to $250/t in 2022.

·        The high premium added to blenders’ incentive to use more Group II base oils.

·        The premium over Group II base oils is ending this year at less than $300/t, down from close to $1,000/t at the start of the second quarter of the year.