Global base oils arb outlook: Week of 7 July

·         US Group II export base oils price-premium to vacuum gasoil starts Q3 2025 at slightly lower levels than at start of Q3 2024.

·         In Q3 2024, US base oils price premium to VGO extends rise after surging from end-Q1 2024.

·         US base oils price-premium to VGO extends surge in Q3 2024 even with less feasible arbitrage to outlets like Europe, Middle East and India.

·         Surge in base oils price-premium to VGO in Q2-Q3 2024 coincides with sustained US supply shortfall versus demand, triggering slide in stocks.

·         US market starts Q3 2025 with Group II heavy-grade export price at steep discount to prices in Europe and India.

·         Steep US price-discount facilitates shipment of more arbitrage cargoes to those markets.

·         Steep price-discount and regular arbitrage cargoes could slow pace of any build-up of surplus supplies in US over coming months.

·         US market already starts Q3 2025 with stocks likely at lower-than-usual levels following plant-maintenance work in US and overseas markets in Q2 2025.

·         US base oils stocks already extend sharp fall to eight-month low at start of Q2 2025.

·         Dynamic suggests that US base oils export-price premium to VGO is well-positioned to repeat or exceed the surge that it enjoyed in Q2-Q3 2024.

·         Yet US base oils export price-premium to VGO in Q2 2025 fails to outpace price-premium in Q2 2024 despite unusually tight supply fundamentals in US and overseas markets early this year.

·         Besides US, base oils supply falls in Europe and Asia at start of Q2 2025 amid overlapping round of plant-maintenance.

·         Base oils supply from Americas, Europe and Asia duly falls in April 2025, matching second-lowest monthly level since mid-2020.

·         Lower output in key global markets points to tighter supply fundamentals this year than last year.

·         US base oils export price-premium to VGO holds in narrow range from early-May 2025 and into start of Q3 2025 despite tighter supply fundamentals.

·         US base oils export heavy-grade price discount to Europe/India prices similarly stays unusually wide for time of year through Q2 2025 and into start of Q3 2025 despite tighter supply fundamentals.

·         More range-bound US base oils margins and sustained feasibility of arbitrage opportunities could reflect attraction of maintaining status-quo.

·         More range-bound US base oils margins and sustained feasibility of arbitrage opportunities could also point to concern that market fundamentals are weaker this year than last year, rather than stronger.

·         Development of market fundamentals over coming months is set to reveal accuracy of any such concerns and the underlying factors supporting them.