Global base oils arb outlook: Week of 19 May

·         US Group II base oils price-premium to vacuum gasoil trends higher in recent weeks compared with Q1 2025, even with dip in premium in mid-May.

·         Group II domestic/export price premium trends higher after holding in relatively narrow range from mid-Nov 2024 to end-Q1 2025.

·         Narrow range contrasts with steeper fall in Group II export price-premium to VGO in Q4 2023 and Q1 2024, followed by sharper recovery from end-Q1 2024.

·         Steeper fall in Group II export price-premium in Q4 2023 and Q1 2024 partly reflects steeper drop in outright prices during that period.

·         Steeper fall in Group II export prices during that period widened sharply their discount to US domestic prices.

·         Steeper drop in outright export prices during that period helped to open the arbitrage to markets like India and Europe.

·         More feasible arbitrage helped to facilitate rise in US base oils export volumes in Q4 2023 and Q1 2024, reversing build-up of surplus supplies.

·         US base oils exports rise even higher in Q1 2025 than in Q1 2024.

·         Higher exports point to similar need to clear large volume of surplus supplies from US market, and to keep open the arbitrage to facilitate such moves.

·         But US Group II export prices fall less sharply in Q1 2025 than during same time last year.

·         Smaller fall in Group II export prices supports their steadier premium to VGO.

·         Smaller fall in export prices helps to maintain narrower discount to domestic prices so far this year vs Q1 2024.

·         Firmer export prices, even with large surplus volumes to clear, point to different supply-demand fundamentals in overseas markets that support those diverging dynamics.

·         Base oils supply falls simultaneously in Americas, Europe, Asia and Middle East in Feb 2025, cutting global supply to lowest since mid-2020.

·         Tighter global supply shows signs of extending through end-Q1 2025 and into start of Q2 2025 because of plant maintenance work.

·         Base oils output in South Korea falls in March 2025 to lowest since mid-2023, reflecting that dynamic.

·         Base oils output in Italy pauses in March 2025 for first time in at least a decade, reflecting that dynamic.

·         Tighter supply in overseas markets supports firmer prices that help to attract additional supplies.

·         Firmer overseas prices curb pressure on size of adjustment in US export prices to make the arbitrage workable to attract additional supplies.

·         Dynamic suggests that firmer US export prices so far this year reflect more the tighter availability in overseas markets rather than a drop in surplus volumes from US market.

·         Dynamic suggests that any easing supply tightness in overseas markets would put pressure on such a drop in surplus volumes from US market to sustain firm US export prices.

·         Supply tightness in Asia especially is set to start to ease in coming weeks as more plant maintenance draws to a close.

·         Dynamic would move onus back onto adjustment in US supplies to sustain firm export prices.