Global base oils - week of Oct 16: Price signals - arbitrage

·        Global base oils values turn unusually volatile versus diesel prices in recent weeks, ICIS data shows.

·        A sustained pick-up in base oils values versus diesel would raise prospect of curbing demand from buyers using light-grade base oils as a fuel-extender.

·        US Group II light-grade export base oil prices maintain premium to heating oil even as they fall from recent highs.

·        India Group II very-light-grade price premium to regional gasoil prices rises in October to highest in more than two months.

·        Mexico’s demand for US base oils held firm through Q3 2023.

·        Strong demand coincided with low US base oils export prices versus heating oil throughout the year, especially in Q3 2023.

·        Mexico’s demand for US base oils supplies exceeds its base oils requirements to produce lubricants by larger-than-usual amount throughout 2023.

·        Mexico’s surplus of base oils supply over finished lube demand gathers pace in Aug 2023.

·        A share of the surplus supplies is likely used as a fuel-extender.

·        Larger-than-usual US base oils exports to Mexico enable refiners to clear surplus light-grade supplies from their domestic market.

·        Attraction of Mexico as outlet for surplus supplies rose in recent months as higher US outright prices during Q3 2023 made less feasible the arbitrage to outlets like India.

·        US arbitrage to India could get even harder to work amid prospect of rising Asia-Pacific supplies of very-light grade base oils in coming months.

·        Any such rise in supplies would incentivize refiners in Asia to offer light-grade base oils at prices that sustain firm demand.

·        India’s retail diesel price premium to cfr India light-grade base oils prices fell in recent months to narrowest in more than a year.

·        Wider retail diesel premium to light-grade prices had previously coincided with stronger demand for light-grade base oils.

·        Asia’s and India’s imported base oils prices would need to fall to widen India’s retail diesel premium to light-grade base oils closer to levels earlier this year.

·        Rebound in Asia light-grade price premium to regional gasoil prices gives refiners more room to adjust prices accordingly in order to boost demand.

·        Any such move would cut further the attraction of supplies from US, which also faces the prospect of more muted demand from Mexico.

·        Any need to sustain firm consumption in markets like India and Mexico would raise prospect of outright price adjustments in Asia and in the US.

·        Refiners could delay such moves to adjust prices in face of unusually volatile crude/diesel prices in recent weeks.

·        The same factors could prompt buyers to hold off for now, raising prospect of supply-build in the interim.