Rising Competitiveness and Overflowing Inventories Push Down Chinese Base Oil Prices During August 2024

The Chinese Base Oil market continued its decline during August 2024 followed by July, despite the adverse weather conditions that disrupted industrial activities and transportation. While the monsoon season and Typhoon Gaemi posed significant challenges, several counterbalancing factors mitigated their impact on demand by proactive inventory management. The oversupply situation, driven by reduced production rates and steady consumption, coupled with expanding domestic production and lower freight rates, has put downward pressure on prices.

During August 2024, several Base Oil buyers proactively built-up inventory in Asia by anticipating the potential disruptions caused by the monsoon season to ensure sufficient supplies were available during their operations. Additionally, the slowing demand and reduced production rates at many Base Oil plants led to an oversupply situation in certain market segments. This imbalance was further aggravated by steady consumption levels, indicating that demand was not keeping pace with production. Buyers were concentrating on obtaining only the Base Oil volumes required for immediate operations since they were aware that prices could drop due to the rainy season. The onset of the rainy season and economic uncertainty resulted in decline in domestic demand for several exporting countries. Amid the off-season, pessimism prevailed, which in turn led to weak market transactions, and the poor demand scenario was sufficiently intensified to settle the prices at USD 932/MT Base Oil II H 500 FOB and USD 896/MT Base Oil I SN 500 FOB, Qingdao, China during August 2024.

Uncertainty surrounding feedstock crude oil prices has also had a significant impact on the Base Oil market. The volatility in these prices has made buyers cautious, leading to subdued demand for additional Base Oil cargoes and a wait-and-see approach. This uncertainty has created a bearish sentiment in the market, contributing to lower prices. Domestic production in China has also played a crucial role in influencing the market. Expanding domestic production capabilities has enabled China to meet a significant portion of its domestic demand, reducing reliance on imports. This increased competition among producers has led to a decline in prices as manufacturers seek to gain market share. The easing of port congestion and the consequent reduction in freight rates have further contributed to lower prices by making it cheaper to deliver Base Oil cargoes. As per ChemAnalyst, the Base Oil market in China is expected to decline further in September 2024 as several participants are anticipated to clear their inventories during this timeframe which could dampen buying sentiments further.