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 $2.50 $2.00 $1.50 $1.00 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan 2019 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