ILMA Compoundings - May 2020 - 17

Argus domestic spot Group II N100 vs Group II N100 posting ($/USG)
$3.50

and the peso weakened versus the U.S. dollar. Mexico's
tax structure in recent years had made profitable the use of
light-grade base oils as a fuel extender for diesel.
U.S. base oil exports of more than 12.6 mn bl in 2019 to
Mexico were up from 10.2 mn bl in 2018 and 5.2 mn bl in
2016, before the new tax structure came into effect, according to the U.S. Energy Information Administration. Base
oils exports to Mexico accounted for about a third of total
U.S. shipments in 2019 and about a fifth of total U.S. base
oils production. Shipments to Mexico accounted for less
than 19% of exports in 2016.
The premium of imported U.S. diesel into Mexico versus
U.S. light-grade base oils almost disappeared by late March.
The wider the premium, the more attractive the shipment of
U.S. base oils to Mexico.
Weaker import demand from Mexico is expected to leave
more surplus light-grade supplies in the U.S. and add to
downward price pressure.
U.S. refiners typically export surplus supplies in order to
keep prices at firmer levels in the domestic market. Even if
production falls, the slump in demand from Mexico would
force producers to find other overseas outlets for a large
volume of surplus supplies in order to prevent oversupply in
the domestic market.
ALTERNATIVE EXPORT OUTLETS LIMITED FOR
U.S. SUPPLIES
There are pockets of demand in South America. U.S. producers can also target the Indian market. But these markets
would struggle to absorb the average 1.1 mn bl/month of
supplies that had been moving to Mexico. Producers would
also face competition from other producers in Asia-Pacific
for the Indian and Mideast Gulf markets. Shutdowns to
slow the spread of the virus in India curbed interest to move
product from the U.S. to that market in April.
More supplies could also move to the European market.
That market is less attractive after the European Union
removed an import tax waiver on Group II base oils from
the start of this year. Group II base oil grades with a viscosity lower than N150 or above N600 are still not subject to
the import tax. But most of Europe's imports fall within
that range.
The European market is also facing pressure from slower
demand as the virus outbreak intensified in countries like

$3.00
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Motiva Group II N100 posting
Argus domestic spot Group II N100

Italy, Spain and France. These are some of the continent's
largest economies.
The more limited number of outlets for Group II light
grades is forecast to put more pressure on that grade relative
to heavy grades. Export prices for N600 are expected to
trend to a wider premium to N100 through the first quarter
of 2021.
GROUP III PRICES TO REMAIN FIRMER
Group III base oil prices also face downward pressure from
weaker fundamentals and lower crude prices. The pricestrength ratio for Group III 4 cst versus crude more than
doubled in March to its highest in more than a decade.
Even with prices forecast to fall, the ratio is set to remain
higher than average levels through 2020 compared to the
past five years.
U.S. Group III prices are forecast to weaken relative to
other regions like Europe and China. The trend would
dampen the attraction of moving more supplies to the U.S.
Such a development would help to counter the impact
of an expected slowdown in demand. Firmer prices for
the premium-grade base oils could incentivize domestic
producers to increase Group III output. This move will
help these refineries curb their excess Group II production.
But it will also add to the surplus of Group III supplies and
place downward pressure on prices for the premium-grade
base oils.
Hong is senior analyst of Argus Base Oils Outlook.
He may be reached at +65-6496-9811 or
guoharn.hong@argusmedia.com.

17

Jan
2020



ILMA Compoundings - May 2020

Table of Contents for the Digital Edition of ILMA Compoundings - May 2020

ILMA Compoundings - May 2020 - Cover1
ILMA Compoundings - May 2020 - Cover2
ILMA Compoundings - May 2020 - 1
ILMA Compoundings - May 2020 - 2
ILMA Compoundings - May 2020 - 3
ILMA Compoundings - May 2020 - 4
ILMA Compoundings - May 2020 - 5
ILMA Compoundings - May 2020 - 6
ILMA Compoundings - May 2020 - 7
ILMA Compoundings - May 2020 - 8
ILMA Compoundings - May 2020 - 9
ILMA Compoundings - May 2020 - 10
ILMA Compoundings - May 2020 - 11
ILMA Compoundings - May 2020 - 12
ILMA Compoundings - May 2020 - 13
ILMA Compoundings - May 2020 - 14
ILMA Compoundings - May 2020 - 15
ILMA Compoundings - May 2020 - 16
ILMA Compoundings - May 2020 - 17
ILMA Compoundings - May 2020 - 18
ILMA Compoundings - May 2020 - 19
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ILMA Compoundings - May 2020 - 21
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ILMA Compoundings - May 2020 - 26
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