Americas/EMEA base oils - week of July 24: Supply outlook

·        Diesel prices rise faster than crude oil, pushing up premium to crude to highest since early this year.

·        Firmer diesel premium to crude, and weaker base oils premium to diesel, adds to incentive for refiners to focus on producing more diesel.

·        US base oils plant maintenance set to end by end-July/early August.

·        Pause in maintenance work raises prospect of pick-up in production unless refiners tweak output to avoid supply-build.

·        Arbitrage shipments to overseas markets provide outlet for surplus supplies.

·        Weak export base oils prices make refinery run-cuts to limit surplus volumes more attractive than arbitrage shipments.

·        US’ sustained surge in base oils exports to Mexico in three months to May points to move to prioritize removal of supply overhang over price of the supplies.

·        Size of shipments to Mexico likely to leave US supplies better balanced heading into Q3 2023.

·        Europe’s base oils supply far exceeds regional consumption at start of Q2 2023 as rising output and imports contrast with slower domestic and overseas demand.

·        Rise in surplus supply cushions impact of regional plant maintenance during Q2 2023, limits room for base oils prices to rise at time of year when margins typically peak.

·        Europe’s Group I base oils output rises strongly at start of Q2 to highest in close to two years.

·        Higher output more than balances out loss of Russian base oils supplies in the region.

·        The dynamic remains feasible so long as Europe’s Group I output stays high.

·        The dynamic likely changed during Q2 2023 and Q3 2023 as plant maintenance work in Italy cut Europe’s output.

·        Italy had been the key source behind Europe’s higher Group I base oils output in first four months of 2023.

·        Weakening base oils values versus crude and diesel add to refiners’ incentive to cut output or extend plant shutdowns.

·        Sustained rise in Europe’s Group I base oils exports to Ukraine raise prospect of further cutting supplies for regional buyers.

·        Shipments to Ukraine rise on back of sharp increase in supplies from Poland, Greece and Hungary.

·        Rise in Europe Group I shipments to Ukraine coincide with slump in Russian Group I shipments to Europe, raising prospect of supply-squeeze.

·        Corresponding fall in Russian base oils shipments to Ukraine complicates further Russia’s ability to secure outlets for its supplies.

·        Wave of premium-grade base oils shipments from Mideast Gulf to Europe in May 2023 cover for shutdown of Group III unit in Spain.

·        Flow of premium-grade base oils shipments from Mideast Gulf to Europe show signs of extending into Q3 2023, even after completion of plant maintenance work in Spain.

·        Europe’s Group III base oils price-weakness in recent months coincides with rising supply even with plant maintenance work in Q2 2023.

·        Premium-grade supplies from UAE rebound in May to five-month high, adding to pick-up in shipments from Qatar.

·        Like Qatar, more of the shipments from UAE move eastwards to outlets like India and China in moves that could be aimed at avoiding supply-build in Europe/US.

·        Trend runs risk of additional premium-grade supplies from Asia-Pacific being re-exported back to Europe/Americas.

·        Trend adds to signs of global oversupply of Group III base oils, while firm margins deter refiners from cutting production.

·        Rise in shipments from Bahrain in May adds further to premium-grade supplies. But shipments move to Europe and US rather than Asia.

·        Trend adds to supplies in those markets and limits the effect of more shipments from Qatar and UAE moving to Asia.