Global base oils - week of Nov 20: Price outlook - arbitrage

·        Global Group III base oils prices face prospect of sustained pressure as supply rises, ICIS data shows.

·        Wide Group III price premium to Group I/Group II prices and structural rise in demand incentivize some refiners to convert some Group II production to Group III.

·        Other refiners in markets like China and India are adding capacity through new Group III base oils plants.

·        Trend raises prospect of additional Group III supply entering the global market in 2024.

·        Current Group III price weakness suggests Group III supply already outpaces demand even before the addition of the new supplies.

·        US Group III price premium to US Group II prices narrows sharply in 2023 but still averages more than $700/t so far this year, versus less than $470/t in 2020-2022.

·        Europe’s Group III (low) price premium to Group II prices falls sharply in 2023 but still averages more than $720/t so far this year, up from average levels of less than $200/t in 2020-2022.

·        US base oils/lube demand falls more than 20pc in first eight months of 2023.

·        US’ domestic supply, or output less exports, falls more than 30pc in first eight months of 2023.

·        US base oils imports, consisting mostly of Group III supplies, fall 5pc in first eight months of 2023.

·        Smaller fall in US’ Group III base oils imports could point to firmer demand for the grade relative to other products.

·        Wide Group III premium to Group II and structural rise in global Group III demand boosts attraction of producing Group III base oils in place of Group II.

·        In the US, Group II re-refiner Safety-Kleen Sustainability Solutions is set to expand Group III production in 2024 after successful test-runs in Q3 2023.

·        Move adds to rise in domestic Group III production in US following conversions from Group II base oils.

·        Additional re-refined Group III production capacity scheduled to come online in Europe in 2024.

·        In Asia, China’s Group III base oils output rises in Oct 2023 to highest in more than two years following start-up of new Group III plant in Q3 2023.

·        India’s Group III base oils output set to rise over coming year as new production capacity starts up in the country.

·        Most of the rise in global Group III supply consists of base oils with limited or no OEM approvals.

·        Gap between Europe Group III low and high price already widens sharply in 2023 in response to balanced-to-tight supplies with OEM approvals, more plentiful availability of supplies with few or no approvals.

·        The new supply raises prospect of extending that dynamic in coming year.

·        Extension of that dynamic could in turn cut further the Group III premium to Group II base oils.

·        An even narrower premium could prompt some refiners to reconsider moves to produce more Group III base oils.