Global base oils - week of Feb 19: Price outlook - arbitrage

·        US Group II base oils export prices extend fall in Feb 2024.

·        Lower export prices widen sharply their discount to US domestic prices.

·        Lower export prices boost feasibility of arbitrage to multiple destinations.

·        Lower export prices slash margins, add to refiners’ incentive to cut production.

·        Lower export prices, and ongoing incentive to maximise exports and cut production, suggest US’ domestic demand stays unusually weak just weeks ahead of start of typical seasonal pick-up in consumption.

·        US Group II export prices fall sharply in Q4 2023, boosting arbitrage opportunities to Latin America, Europe, Africa and India.

·        Lower prices coincide with surge in US base oils shipments in Nov and Dec 2023, boosting Q4 2023 exports to record-high.

·        Surge in US base oil exports balances out weak domestic demand, limits supply-build at end-2023.

·        US export price discount to prices in domestic and overseas markets stays unusually wide in Jan 2024, widens further in Feb 2024.

·        Wider price discount raises prospect of US base oils exports to markets like Africa and India staying higher than usual in early 2024.

·        Steep price discount and higher-than-usual exports point to ongoing supply-surplus.

·        US export price premium to VGO extends slide to lowest since 1H 2020 when Covid-related restrictions cut domestic and overseas demand.

·        US refiners slashed production in 1H 2020 in response to weak demand and prices.

·        High base oils exports in Q4 2023 coincide with steep, and then ongoing, price discount to prices in domestic market, to prices in other regions, and to VGO prices.

·        Trend suggests that US’ domestic demand remained weak in early 2024.

·        Wave of exports and incentive for refiners to cut production likely cushions impact of weak domestic demand, limits size of supply-build in early 2024.

·        Trend of steep export price discounts and high export volumes likely to continue if US’ domestic demand stays weak.

·        Trend of steep export price discounts and high export volumes leaves US refiners with smaller surplus to meet consumption if US’ domestic demand revives.