US DOMESTIC GROUP I & GROUP II BASE OIL PRICES ($/USG) $3.25 $3.05 $2.85 Exxon GI SN 150 posting ($/USG) Argus dom GI SN 150 ($/USG) Motiva GII N100 posting ($/USG) Argus dom GII N 100 ($/USG) $2.65 $2.45 $2.25 $2.05 $1.85 $1.65 $1.45 $1.25 Sep 2015 Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 2015 2016 2016 2016 2016 2016 2016 2017 2017 2017 2017 2017 2017 US DOMESTIC GROUP I I N100 PREMIUM TO 4-WEEK AVERAGE VGO ($/USG) $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 0 JAN 2014 JUN 2014 NOV 2014 APR 2015 SEP 2015 FEB 2016 JUL 2016 DEC 2016 MAY 2017 from the second quarter of 2015 to the second quarter of 2017. Mexico's base oils imports have increased substantially, even as its lubricant demand has declined. This trend is likely to continue as long as it remains cheaper to import light-grade base oils than it is to import diesel. LOOKING FORWARD Group I supplies are likely to remain balanced through the first quarter of 2018. HollyFrontier has planned a six-week maintenance on several units, including the facility's sole crude unit, to start in February. The Group I producer worked to build feedstocks and base oils a few months ahead of the planned maintenance. TonenGeneral should complete repairs on its Group I plant in Japan and resume heavy-grade production there by the end of the first quarter. Regular shipments of Group I supplies from the U.S. Gulf Coast stopped moving to southeast Asia after Harvey made landfall. These shipments are unlikely to resume after the Japanese refinery restarts production. Group II supplies are likely to remain balanced in the first quarter of 2018. Some Group II producers that had storm-related shutdowns are unlikely to have spot supplies OCT 2017 until sometime in the first quarter. Even though all of the major U.S. Group II refineries had two shutdowns in 2017, a couple of virgin base oils refineries are expected to have planned maintenance sometime this year. Group III supplies are also likely to remain balanced in the first few months of 2018. Unplanned and extended maintenance of Tatneft's Group III plant in Russia that ran from October to December will curb availability and limit shipments of unapproved base oils to the U.S. The lingering Group II light-grade base oils tightness should also prompt some domestic producers that have recently converted some of their production to Group III to instead produce more Group II base oils. Most semi- and fully approved Group III base oils that move into the U.S. are term supplies. This balance could turn into oversupply in 2018, when more unapproved supplies from the Mideast Gulf move to the U.S. market. Molina is the editor of Argus Americas Base Oils. She can be reached at 713-360-7560 or eva.molina@argusmedia.com. 17