Lower diesel prices signal potential shift in base oil refinery output

The European diesel market has experienced a notable downturn recently, raising implications for base oil refinery output. As market dynamics exert downward pressure on diesel margins, refiners reevaluate their production strategies to adapt to the changing landscape.

Recent Platts data shows that the CIF Northwest Europe ultra-low sulfur diesel (ULSD) cargo differential to ICE low sulfur gasoil (LSGO) futures plummeted from $24/mt on March 12 to just $13/mt by March 17. Similarly, the Mediterranean differential decreased from $15.75/mt to $9.25/mt over the same timeframe.

In the base oil market, Group II 600N CFR Europe cargoes were assessed at $1,200/mt March 17, steady week over week. Platts also assessed flat the Group III 4 CST CFR Europe base oil at $1060/mt, while 6CST CFR Europe was assessed at $1070/mt, down $5/mt week over week.

The decline in ULSD prices may see refiners reassess their operational focus, as diesel and base oil compete for the same feedstock, vacuum gas oil.

Weaker diesel refining margins prompt refiners to assess their per-unit costs, and if they find base oil more profitable, they may switch to competing products.

With the arrival of seasonal demand for base oils, a shift in refinery output toward increased production of Group II and III grades is anticipated.

The expected uptick in lubricant demand from blenders in April and May will likely drive higher production and consumption of these critical grades, which are essential for high-performance industrial and automotive lubricants.

Geopolitical factors also continue to shadow the base oil market, and ongoing tensions and trade policies could potentially impact supply chains.

Industries such as automotive and manufacturing, which rely heavily on Group II and III base oils for lubricant production, could face increased production costs amid tariff introductions.

Platts is a part of S&P Global Commodity Insights.