Global base oils arb outlook: Week of 24 Feb

·         Asia’s Group I brightstock price premium to Singapore gasoil extends rises in Q1 2025 to highest since Q4 2021.

·         Asia’s Group II heavy-neutrals price premium to gasoil stays rangebound at high level since Q3 2024.

·         Price strength of brightstock and Group II N500 relative to gasoil and relative to other base oil grades incentivize refiners to increase supply of the heavy-grade base oils.

·         Outperformance of brightstock versus Group II N500 highlights difficulty of boosting brightstock output compared with N500.

·         Asia’s Group II N500 price rises to increasingly steep premium to Group II light grades and to Group I SN 500.

·         Sustained strength of Asia Group II heavy-grade prices incentivizes refiners to boost output of the product.

·         Taiwan’s Group II heavy-grade base oils exports surge in Jan-Feb 2025 as share of total shipments.

·         India’s Group II heavy-grade imports rise to eight-month high in Jan 2025 on rebound in shipments from markets like South Korea and Singapore, as well as US.

·         Rise in imports of Group I heavy neutrals also highlights buyers’ option of procuring more of those supplies in place of Group II heavy grades.

·         Rise in Pakistan’s Group II heavy-grade base oils imports in 2024, and rising share of those imports from US, free up additional supplies from other sources like South Korea.

·         Group II heavy-grade prices stay high even with rise in supply and alternative supply options.

·         Dynamic points to heavy-grade price-strength more because of rising demand than tight or falling supply.

·         Even so, range-bound Group II margins in recent months suggests that any supply-demand imbalance has stabilised.

·         Refiners’ ability to increase Group II supply contrasts with shrinking production capacity of Group I brightstock in Asia following wave of plant closures.

·         Structural tightness curbs refiners’ ability to raise brightstock output in response to higher margins.

·         Structural tightness in other regions curbs flow of arbitrage shipments to markets like India, increasing its reliance on supplies from Asia.

·         Dynamic points to brightstock price strength more because of tight or falling supply than because of rising demand.

·         Group II heavy-grade margins remain at elevated levels as higher demand sustains requirement for more supplies.

·         Steady demand would by contrast sustain requirements for sufficient rather than rising supplies.

·         Ongoing rise in Group I brightstock margins in recent months suggests that supply continues to lag relatively steady demand. 

·         Any improvement in brightstock supply would help to meet that demand.

·         Brightstock margins would then require rising demand to mirror similar trend to Group II heavy-grade margins.