Global base oils - week of May 22: Price outlook - arbitrage

·        Widening US Group II base oils discount to Europe prices facilitates shipment of more arbitrage supplies to that market.

·        Asia Group II price discount to European prices holds at widest in more than three months, facilitating shipment of more arbitrage supplies to Europe.

·        Possibility of more US/Asia supplies moving to Europe also raises prospect of the supplies covering demand in markets that Europe also targets with its supplies.

·        Scenario is sustainable if Europe demand is strong and there is little-to-no surplus supply.

·        Scenario raises prospect of speeding up build-up of surplus supply in Europe if demand weakens.

·        Asia Group I discount to Europe prices holds at widest level since October – boosting attraction of moving supplies to markets like India/Mideast Gulf.

·        Trend cuts competitiveness of any surplus European supplies targeting those markets.

·        Arbitrage to move Asia supplies to US/Americas gets harder to work – cutting off key outlet that surplus Asia supplies targeted during 2H 2022.

·        US Group III prices maintain narrower premium to Europe prices, curbing incentive to prioritise US market with Group III supplies.

·        Asia Group I SN 500/bright stock discount to domestic Chinese prices narrows further, making arbitrage hard to work unless cargo prices fall or domestic Chinese prices rise.

·        Asia Group I SN 150 prices maintain steep discount to domestic Chinese prices – making arbitrage workable on paper.

·        Workable arbitrage contrasts with steady monthly flow of Chinese Group I SN 150 cargoes to India.

·        Asia Group II price discount to domestic Chinese prices narrows further, making arbitrage increasingly unfeasible.

·        Unattractive arbitrage suggests China’s base oils supply is sufficient to meet demand.

·        Unattractive arbitrage deters sellers from moving supplies to China, cutting impact of regional plant maintenance work.

·        Unattractive arbitrage incentivizes sellers to instead target other markets with surplus supplies.

·        Global Group II prices suggest Mideast Gulf/Europe is more attractive outlet than Americas market for any surplus supplies.