Global base oils - week of Nov 6: Price outlook - arbitrage

·        Global base oils prices face prospect of adjustment in response to fall in Group I base oils supply, rise in Group II base oils supply, ICIS data shows.

·        Asia-Pacific Group I base oils supply falls following permanent closure of 360,000 t/yr Group I base oils plant in Japan in Oct 2023.

·        US Group II base oils supply could rise after Mexico imposes stricter rules on imports of oil products into the country.

·        Asia’s tighter Group I base oils supply could support regional prices at levels that keep more supplies in the region and deter arbitrage shipments to markets like India and UAE.

·        Asia’s Group I base oils prices maintained wide discount to cfr India prices over the past year, triggering larger-than-usual flow of arbitrage shipments to India/UAE in recent months.

·        Asia’s Group I price discount could adjust accordingly in response to tighter supply-demand fundamentals in southeast Asia.

·        Any subsequent fall in arbitrage shipments from Asia to India or UAE would boost demand in those markets for supplies from alternative sources.

·        Arbitrage to move Group I cargoes from Europe to India/UAE stays shut throughout most of this year amid tight supply in Europe.

·        More limited supply options could incentivize buyers to use alternatives such as Group II base oils instead, or to accept higher prices to attract more cargoes.

·        Tighter Group I supply contrasts with prospect of rise in Group II supplies.

·        Surplus Group II supply in US likely to rise amid seasonal slowdown in domestic demand at year-end.

·        Mexico’s stricter rules on oil product imports likely to trim US supplies bound for that market, adding to the surplus.

·        US base oils exports exceeded Mexico’s lube demand by around 55,000 t/month in Jan-Aug 2023.

·        Surplus widened from around 11,000 t/month in 2022.

·        Rise in surplus supply in US likely to coincide with pick-up in Group II supplies in Asia at year-end following completion of regional plant maintenance work.

·        Trend raises prospect of US base oils prices adjusting to levels that make arbitrage workable to outlets like India.

·        Prospect of tighter Group I supplies and more plentiful Group II supplies moving to markets like India could impact the price spread between Group I and Group II prices for that market and elsewhere.