ARGUS DOMESTIC SPOT US GROUP II N600 MINUS N100 ($/USG) $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Jan 2017 Jun 2017 Nov 2017 Apr 2018 Sep 2018 Feb 2019 Jul 2019 Dec 2019 May 2020 ARGUS DOMESTIC SPOT US GROUP III 4CST VS GROUP II N100 ($/USG) $1.20 $1.10 $1.00 $0.90 $0.80 Base oil prices are forecast to rise during the same period. But current expectations for the increase in supply availability will likely curb their ability to keep pace with rising crude prices. The average price-strength ratio for U.S. base oils is forecast to average 1.60 during the forecast horizon. Weaker base oil prices relative to rising crude and diesel prices are likely to boost interest in light-grade supplies for use as a fuel extender in markets like Mexico. About a fifth of total U.S. base oils production ended up moving to Mexico in late 2019. Exports to that country accounted for about a third of total U.S. base oil exports. Relatively high imported diesel prices in Mexico and the country's tax structure continue to promote the usage of light-grade base oils as a fuel extender. But those shipments subsided in April and May, when diesel prices slumped and demand fell as the U.S. and Mexico went into a lockdown to combat the pandemic outbreak. Diesel prices rebounded by more than 25% in June to about $45 per barrel The higher fuel prices have boosted interest from Mexico for imported light-grade supplies. A further pickup in such shipments will likely provide additional price support to light-grade supplies in the U.S. But it is also likely to incentivize more production of light grades at a time when the spread between heavy- and lightgrade base oils is already significantly narrower than usual. HEAVY-GRADE PREMIUM TO LIGHT-GRADE NARROWS Group II N100 and N600 were priced similarly in June in the domestic market. This is the lowest heavy-light spread on record. The historical premium has averaged 54 cents per gallon. The trend will likely incentivize refiners to increase production of light-grade base oils and cut back on heavy-grade output where possible. Refiners typically produce more lower-viscosity grades because of their suitability for use in a wider range of applications. They can also be diverted into the distillates pool relatively easily. Refiners had cut back on light-grade production in recent months in response to weaker diesel and base oils demand and rising inventories. Domestic and export demand has remained weaker for heavy grades. This has led to a persistent oversupply for $0.70 $0.60 $0.50 $0.40 Jan 2017 Jun 2017 Nov 2017 Apr 2018 Sep 2018 Feb 2019 Jul 2019 Dec 2019 Group II heavy grades. But overseas demand for these grades has been stronger than expected from West Africa to the Mideast Gulf and Asia-Pacific. The spread between light and heavy grades is forecast to remain narrower than usual. But rising production of light grades and firm overseas demand for heavy grades is expected to support firmer heavy-grade prices relative to light grades. GROUP III PREMIUM TO GROUP II TO HOLD FIRM U.S. Group III 4cst base oil prices will remain firm relative to Group II N100 prices. The price strength reflects their smaller price drop compared with N100 prices. Even so, Group III prices are forecast to rise at a similar rate to Group II N100 values through next June. Group II N100 prices are likely to continue to get support from firmer Mexican demand. Group III demand was set to get a boost following the introduction of the new ILSAC GF-6 and GM's dexos1 Gen 3 engine oil specifications this year. The pickup in demand for the premium-grade supplies in June has lagged the recovery for Group II and Group I base oils. Group III suppliers have taken longer to clear their higher inventories since lockdown restrictions have eased. Domestic U.S. Group III 4cst prices are currently at a $1.05 per gallon premium to domestic Group II N100 prices. The premium is close to its highest level since firsthalf 2017. But that premium is forecast to average lower at 95 cents per gallon. Hong is senior analyst of Argus Base Oils Outlook. He may be reached at +65-6496-9811 or guoharn.hong@argusmedia.com. 19 May 2020