Asia base oils - week of Aug 14: Supply outlook

·        China’s Shandong diesel premium to crude oil edges down after strong rebound since late June 2023.

·        Firm premium incentivizes refiners to prioritise diesel production over base oils.

·        India’s retail diesel premium to crude oil falls to lowest since Nov 2022, stays unusually firm for crude oil supplies at discounted prices.

·        Asia’s Q2 2023 base oils supply falls by more than 300,000t from Q1 2023.

·        Drop in supply counters slowdown in Q2 2023 lube consumption vs Q1 2023, limits supply-surplus ahead of further demand slowdown during Q3 2023.

·        Recovery in Asia’s Q3 2023 base oils supply likely to be more muted amid additional plant shutdowns, run-cuts, and slow recovery in China’s base oils output.

·        China’s August base oils output likely to be impacted by additional plant maintenance work.

 ·        Weak lube demand complicates Chinese refiners’ moves to raise prices in response to higher feedstock costs – incentivizing run-cuts.

·        China’s paraffinic base oils output dips to four-month low in July, falls below year-earlier levels.

·        Base oils output falls amid additional plant maintenance work and weak margins.

·        Fall in base oils output suggests China’s economic recovery stays muted in Q3 2023.

·        Fall in base oils output suggests regional refiners can absorb weaker margins more effectively than Chinese refiners.

·        Regional refiners better able to absorb weaker margins as their wider customer base allows for strength in some markets to counter weakness in others.

·        Chinese refiners’ reliance on domestic market leaves them more exposed to weakness in that market.

·        China’s imposition of consumption tax on industrial white oils in early July slashes their competitiveness versus base oils – raising prospect of some domestic refiners switching to other products more permanently.

·        China’s low base oils output eases concern of surge in additional base oils supply in Asia-Pacific this year following ending of country’s zero-Covid policies at end-2022.

·        China’s low base oils output vs year-earlier levels instead raises prospect of firmer demand for supplies from regional refiners.

·        China’s total July base oils supply shows signs of slumping as imports fail to counter fall in base oils output.

·        Drop in supply suggests blenders preferred to maintain low stocks, raising prospect of stronger pick-up in demand during shorter time period ahead of seasonal rise in demand in late Q3 2023.

·        Base oils output in other markets in Asia stays steady-to-low through Q2 2023 even with lower-than-expected output in China.

·        Thailand’s June base oils output rises to three-month high, holds in narrow range.

·        Thailand’s 1H 2023 base oils output stays much lower than 1H 2022 levels.

·        Higher June output coincides with firm Asia base oils margins in Q2 2023 and open arbitrage to India, Mideast Gulf and Europe.

·        Steady output and regular arbitrage flows curb size of supply-build in Thailand ahead of seasonal slowdown in demand in Q3 2023.

·        Thailand's supply surplus still jumps to ten-month high in June in face of increasingly weak domestic demand.

·        Seasonal slowdown in demand in Q3 2023 and weaker regional base oils margins incentivize Thailand’s refiners to trim output to maintain supply-demand balance.  

·        South Korea’s June base oils output falls 30pc yoy to lowest in more than two years.

·        Size of fall in output exceeds production capacity of plant taken offline for maintenance work.

·        Size of fall in output suggests other South Korean refiners also cut production in June.

·        Size of fall in output cuts regional supply-build ahead of seasonal slowdown in Q3 2023.

·        Output likely partially recovered in July following completion of maintenance work; weak base oils margins sustain incentive for refiners to maintain lower output.

·        Singapore’s base oils exports slump last week to unusually low levels.

·        Fall in shipments points to either logistical issues that would likely trigger a rebound in exports this week, or production issues that would likely take longer to trigger a rebound in exports.

·        Indonesia’s Group III base oils exports stay lower than usual throughout 2Q 2023, with slump in flows to South Korea especially.

·        Indonesia’s lower Group III exports in 2H 2022 exacerbated global supply tightness at the time.

·        Indonesia’s lower Group III exports in 1H 2023 coincide with plant maintenance in Europe, still do little to ease signs of growing supply surplus.