Slow Asian demand offsets tight Group I base oil supply

A seasonal end of year slowdown in base oil demand is offering some respite to persistently tight Asian Group I base oil spot supplies.

Asian Group I supplies have been structurally short since the closure of multiple Group I plants in recent years, while new or expansion projects in Asia are mostly producing premium grades.

Key Japanese refiner Eneos permanently shut its 360,000 t/yr Group I base oil plant in Wakayama in October, while its 225,000 t/yr Mizushima-A Group I plant underwent a three-month planned maintenance from the end of August, adding to the supply crunch. The Mizushima-A plant restarted in late November, but exports remain limited as a result of tight supplies.

This caused Asian Group I SN 500 fob export prices to flip to a premium of $65/t to Asian Group II N500 fob export prices, much higher than the five-year average discount of $15/t. But buying indications for Group I have begun edging down, impacted by recent weak feedstock costs and rapidly falling Group II base oils prices.

Overall demand has also weakened on the back of a seasonal lull, as business activities slow down at the end of the year and blenders hold back from replenishing supplies as part of inventory management.

Some Asian downstream blenders have switched from using Group I to Group II base oils, if they have the flexibility to do so, given limited spot supply for Group I base oils for an extended period.

Bright stock is an exception as it is not easily substituted with Group II neutrals. The heavy grade base oil is typically used in marine and heavy industrial applications.

But demand from China is easing during the winter season, when the use of high viscosity bright stock reduces. Recent cargo arrivals have also added to selling pressure in the domestic market.

India remains an active importer in Asia, but Indian blenders have reduced their reliance on Asian Group I imports and lowered buying indications. A buy-sell gap has hindered Group I trades between India and the rest of Asia.

Indian blenders have turned to alternative Group II substitutes or term volumes for their consumption. More importantly, Indian domestic Group I supplies are stable and available, and are competitively-priced compared to imports. Access to discounted Russian crude has likely contributed to cost competitiveness of Indian domestic supplies. Russian crude exports to India for October-loading jumped 18pc on the month to 1.97mn b/d, during India's peak festive season.

By Chng Li Li and Tara Tang