Asia base oils - week of Sep 25: Supply outlook

·        Asia-Pacific base oils supply set to tighten over coming weeks in face of squeezed margins, plant maintenance and plant closure.

·        China’s Shandong diesel prices hold firm versus crude oil, contrasting with weak base oils value versus diesel.

·        China’s rising feedstock costs put pressure on domestic refiners to raise prices.

·        China’s squeezed base oils margins incentivize refiners to cut output or extend plant maintenance work.

·        There are some signs of such moves.

·        China’s September base oils output still likely rises strongly versus August even with some extended or additional plant maintenance work.

·        More plentiful supply and blenders’ preference to manage stocks carefully likely to limit refiners’ leverage to raise prices.

·        Blenders’ moves to raise their own finished-product prices gives them more room to absorb higher prices.

·        Blenders also likely to face resistance from end-users to higher finished-lube prices.

·        China’s Group I base oils imports fall in August to six-year low on weak demand, tighter supply.

·        Prospect of further drop in supply from Japan likely to leave China even more reliant on Thailand for any Group I base oils requirements.

·        Slack demand in northeast Asia markets like China boosts pressure on South Korea’s refiners to target other more distant markets.

·        Trend likely to boost competition for markets in southeast Asia and for India.

·        South Korea’s exports to India could in turn start to face pressure when new production capacity in that market begins operations in the coming months.

·        South Korea’s base oils exports to southeast Asia hold firm in August amid ongoing rise in shipments to markets like Vietnam, Singapore and Philippines.

·        Trend highlights importance of region for refiners throughout Asia and importance of growing demand growth in the region.

·        Singapore’s August base oils exports exceed 200,000 t/month level for just second time since early 2020.

·        Rise in shipments coincides with higher exports from South Korea and Taiwan in August.

·        Higher regionwide shipments give blenders the opportunity to replenish stocks ahead of seasonal pick-up in demand from late Q3 2023.

·        Any such moves would curb buyers’ urgency to lock in more supplies in the coming weeks, and give them leverage to rely on term shipments to cover requirements.  

·        India’s August base oils supply falls to eight-month low as domestic output dips to one-year low.

·        Drop in supplies precedes seasonal rise in lube demand from end-Q3 2023, raising prospect of pick-up in base oils requirements from overseas sources.

·        Those sources are less likely to include significant volumes from the US amid less workable arbitrage, and from Taiwan amid plant maintenance work in Q4 2023.