Global base oils arb outlook: Week of 10 Feb

·         US moves to implement tariffs on supplies from overseas sources raise prospect of rise in uncertainty and costs, and change in trade flows for multiple products, including base oils.

·         Even without implementation of tariffs, possibility of such moves and counter-moves generates additional risk.

·         US remains reliant on base oils imports for most of its Group III base oils supplies.

·         US base oils imports hold steady in 2024 at more than 14.8 million barrels (2.1 million tonnes).

·         Supplies from Canada account for around 12-13% of total US base oils imports in 2021-2024.

·         Relatively small share of supplies suggests that impact of any disruption to flows from Canada would be more muted and manageable.

·         But blenders’ lubricants formulations could complicate ease and speed of switching to alternative sources in place of those supplies.

·         Relative inelasticity of demand in short-term puts onus on buyers to absorb any higher cost.

·         Canada’s proximity to US boosts its attraction compared with Asia and Middle East, the US’ key sources of Group III base oils.

·         Shipments from Middle East account for more than 50% of total US base oils imports in 2024, up from 41% share the previous year.

·         Shipments from South Korea account for 30% of total imports in 2024, up from 26% share in 2023.

·         Longer shipment time between loading and delivery of supplies from those markets increases risk of implementation of tariffs while shipments are enroute to US.

·         Uncertainty about possibility and timing of any new tariffs boosts attraction of shipments with shorter delivery time and of cutting over-reliance on any single market.

·         Uncertainty boosts attraction of moving more cargoes from South Korea and Middle East to markets that are less likely to impose tariffs, such as Europe.

·         Europe’s Group III base oils prices weaken relative to US prices since end-Q3 2024.

·         Any moves to direct more shipments to Europe instead of US could exacerbate the price trend by adding to supply in Europe and cutting volumes bound for US.

·         Any reciprocal moves to impose tariffs on shipments from US would similarly impact costs and trade flows from US to those markets.

·         Mexico is destination for more than 20% of US base oils and lube exports in 2022, more than 35% in 2023, and more than 40% in 2024.

·         Europe is destination for more than 23% of US base oils exports in 2022-2024.

·         Prospect of additional tariffs on US base oils imports and exports was previously small.

·         Prospect of additional tariffs is now higher than before.

·         Even without implementation of tariffs, prospect of such a scenario generates uncertainty, complicates planning and increases costs.