Global base oils arb outlook: Week of 5 May

·         Europe Group III base oils price trends higher vs prices in US and Asia over past two months.

·         Europe Group III price trends higher vs domestic Group I price and VGO, holds firm vs domestic Group II price.

·         Europe’s firmer Group III price differentials could reflect correction following sustained weakness.

·         Simultaneous improvement in Europe’s Group III price vs other base oils groups, vs other regions and vs feedstock prices suggests recent price strength points to other factors in addition to a price correction.

·         Europe’s Group III base oils price differential strengthens vs ex-tank China prices by end-April 2025 to firmest level in more than six months.

·         Stronger Europe Group III price differential follows surge in China’s Group III base oils output to multi-year high in March 2025.

·         Higher output adds to sustained rise in China’s Group III output since start of H2 2024.

·         China’s rising Group III output coincides with muted economic growth even before start of trade war with US.

·         China’s domestic Group III price duly weakens vs Group II prices and vs overseas prices, cutting attraction of moving more Group III base oils to the country.

·         Europe’s Group III price differential strengthens vs US Group III prices since early-March 2025.

·         Improving price-differential points to firmer supply-demand fundamentals in Europe vs US.

·         Firmer fundamentals in Europe could suggest scheduled Group III plant maintenance in Middle East in Q2 2025 is set to have larger impact on supply in Europe than in US.

·         But US is largest importer of Group III base oils from Bahrain and UAE.

·         Dynamic suggests US is likely to face similar or larger impact than Europe from any drop in supplies from Middle East.

·         Firmer fundamentals in Europe could point to tighter supply from other sources.

·         South Korea’s base oils exports to Europe fall in Q1 2025 to lowest since H2 2023.

·         Slowdown from South Korea coincides with low shipments of premium-grade base oils from Spain to northwest Europe in Q1 2025 for second straight quarter.

·         Premium-grade exports from Spain to northwest Europe then rebound to nine-month high in April 2025.

·         Firmer fundamentals in Europe could reflect improvement in demand even amid still-weak outright lube consumption.

·         Europe Group III 4cSt (low) price premium to Group II N150 extends fall at end-2024, before slipping to discount to N150 in Feb-March 2025.

·         Increasingly similar price levels over extended period boost incentive for blenders to use more Group III base oils.

·         Any impact of tariff wars also more likely to impact Group II base oils, of which US is a key supplier, rather than Group III base oils, whose suppliers are outside the US.

·         Any such concerns could further boost demand for Group III base oils.

·         Europe Group III base oils prices remain unusually weak relative to other base oils groups and feedstock prices.

·         Recent improvement in Group III price differentials suggest some of the factors driving that weakness are starting to ease or reverse.