Southeast Asia's July Lubricants Demand Steadies As Supply Surges

Southeast Asia's lubricants demand steadied in July, but a surge in imports from other Asian refiners left the region with a growing supply overhang that could prompt refiners to target other markets.

Demand fell 1% year on year to less than 190,000 tonnes in July, but held within a narrow 178,000-189,000 tonne range for a third straight month, Ministry of Energy, PSA, Statistics Indonesia and other government data showed.

Demand had exceeded 200,000 tonnes in each of the previous four months.

Steadier demand at lower levels contrasted with a rise in base oils imports from Asian refiners to a two-year high, widening the region’s supply overhang for a second straight month.

The steadier consumption added to signs that destocking was fading, with demand and inventories reverting to more typical levels amid sufficient regional supply.

The extra imports then left the region increasingly oversupplied relative to its needs.

Key Highlights

·         Southeast Asia's lubricants demand fell 1% year on year in July, easing sharply from an 11% drop in June and a 2% fall in May.

·         Thailand's lubricants consumption fell 13% year on year in July, a third straight month of decline that eased from a 26% plunge in June; engine oil demand fell 18% and other lubricants fell 9%.

·         Vietnam's base oils and lubricants imports kept rising in July, while the Philippines' imports rebounded after slowing in May and June.

·         Asia's base oils exports to Southeast Asia rose to more than 220,000 tonnes in July, a two-year high, after climbing to more than 215,000 tonnes in June, itself a 23-month high.

·         Exports outpaced demand by more than 30,000 tonnes for a second straight month, the second-largest gap in two years after June's record.

Market Repercussions

The export surge into Southeast Asia followed its recent shortfall and firmer prices relative to China and India, making the region a more attractive outlet for Asian refiners.

But steadier demand and a growing surplus could curb the region's appetite for supply at such elevated levels, reducing the pull on refiners' barrels.

Any such slowdown in demand would put pressure on refiners to redirect barrels elsewhere, although alternatives are readily available.

China’s Group II balance is tightening as domestic production falls and imports remain unattractive, while India’s supply balance also came under pressure at the start of the third quarter.

Prices in both markets firmed relative to FOB Asia through August, consistent with those firmer supply balances, while the arbitrage to the Americas remains open.

With those outlets available and little competition from suppliers elsewhere, Asia's refiners face limited risk of a supply build even if Southeast Asia's consumption eases, a backdrop likely to support demand for Asian barrels.