FIRM FUNDAMENTALS SUPPORT US BASE OIL MARGINS 700 600 Dom SN 150 - diesel Dom BS - diesel Dom N220 - diesel Dom 4cst - diesel Dom SN 500 - diesel Dom N100 - diesel Dom N600 - diesel 500 $/t 400 300 200 Higher crude values put pressure on base oil margins. But firm fundamentals gave producers the leverage to raise their prices in response that squeeze on margins. They implemented another round of producer posted price increases in the second half of January. Firm supply and demand fundamentals will likely limit the size of any price drop from the second quarter of the year. Domestic and overseas consumption are likely to get a boost as lockdown measures are eased and economic activity revives. Maintenance work in the U.S. and in overseas markets will continue to impact supply. EXPORT PRICES RISE TO PREMIUM TO DOMESTIC PRICES Most domestic Group I and Group II base oil grades are currently at a discount to export values except for bright stock. The bright stock domestic price premium of $6/t is the lowest since early 2010. The trend reflects firmer fundamentals in export markets, where refinery turnarounds and run cuts have tightened spot availability. Demand is also recovering at a faster pace in other regions like Asia-Pacific, where the spread of the COVID-19 virus is under more control. Domestic prices are likely to strengthen relative to export values as demand revives. Domestic supply is also likely to remain relatively tight, even if refiners raise their run rates in response to firmer demand and fuel margins. Strong demand from overseas markets provides them with a ready outlet for their surplus base oils. Domestic prices have been at a discount to export prices since the second quarter of 2020. The last time that happened was in 2011. The premium of domestic Group I prices over export prices has averaged $71/t since 2011. For Group II base oils, the domestic price premium has been $48/t. Domestic Group I and Group II prices are forecast to revert to a premium to export prices in the second quarter. The average Group I domestic premium is then 100 0 2018 2019 2020 2021 2022 -100 forecast to rise to around $45/t by the end of the forecast horizon. Domestic Group II prices are forecast to adjust to a $33/t premium over export prices by the end of the forecast period. GROUP III PRICES TO HOLD FIRM AMID TIGHT SUPPLY Domestic U.S. Group III 4cst prices trended higher in January amid balanced-to-tight supply. Throughout the second half of 2020, their price premium to domestic Group II N100 has held at its highest level since 2017. That price strength is extending into the first few months of 2021. Group III prices got support from reduced shipments from key sources like Asia-Pacific. Upcoming plant maintenance work in other regions is set to keep supply tight over the coming months. Rising demand for Group III base oils in other markets is adding to competition for the tight supplies. Group III prices are forecast to remain firm versus Group II base oils in the following months. But their premium to Group II is set to ease later in the year. The trend reflects a gradual recovery in Group III supply availability and firmer fundamentals for domestic Group II prices. Maintenance work on several Group III plants in Europe is expected to be completed by the end of the first half of this year. Group III 4cst price premium to domestic Group II N100 prices has averaged $238/t since 2018. The current premium is around $324/t. The premium is forecast to slip back to an average of $268/t during the forecast horizon. Hong is senior analyst of Argus Base Oils Outlook. He may be reached at +65-6496-9811 or guoharn.hong@argusmedia.com. 13