· Rising feedstock costs and firm diesel values versus crude incentivize region’s refiners to focus on maximising middle distillates production, cutting base oils output.
· Prospect of rise in China’s domestic base oils supply in September and muted seasonal rise in demand likely to curb refiners’ leverage to adjust prices in a way that keeps pace with rising feedstock costs.
· Trend would keep refiners’ margins under pressure and incentivize more run-cuts or shutdowns for maintenance.
· Recent start-up of new production capacity in China likely to have more impact within rather than outside the country, adding to domestic supply and pressure on margins.
· Base oils supply outside China set to tighten because of ongoing and upcoming plant maintenance work from northeast Asia to India.
· Other refiners face little incentive to raise production unless margins improve.
· Asia’s July base oils supply stays lower than usual, cushioning impact of seasonal slowdown in demand in Q3 2023.
· Lower supply limits build-up of surplus volumes, contrasting with same period last year.
· More balanced fundamentals curb need to clear supplies at prices that make arbitrage feasible.
· Asia base oils prices weaken versus crude and diesel in July-August despite more balanced fundamentals.
· Weaker prices incentivize refiners to maintain lower output or to cut production further.
· Trend raises prospect of tighter-than-expected supply and fewer arbitrage shipments to more distant markets.
· South Korea’s August base oils exports stay unusually low even as they recover from multi-year lows in June and July.
· Muted recovery, even after completion of plant maintenance work, points to run-cuts and pressure from increasingly weak base oil margins.
· Extension of weak margins through August incentivizes South Korean refiners to extend run-cuts through September.
· Taiwan’s August base oils exports to India rebound after pause in July amid increasingly regular flow of large volumes to the country.
· Taiwan’s exports to India likely to fall in coming months as plant maintenance cuts output.
· Fall in shipments from Taiwan to India would coincide with slowdown in arbitrage flows from US to India.
· Slowdown in shipments would coincide with seasonal rise in India's base oils and lube demand during festivals season.
· Taiwan’s base oils imports from Japan slump to three-year low in July and August.
· Drop in imports could be precursor of future slowdown in shipments from Japan following imminent closure of another Group I plant in the country.
· Trend would leave Taiwan even more reliant on southeast Asia to cover its Group I base oils requirements.
· Singapore’s weekly base oils exports to Indonesia continue to outpace its shipments to China and India.
· Trend highlights ongoing structural shift in supplies towards southeast Asia amid firmer demand in the region compared with China.