US vacuum gasoil (VGO) prices rose to their highest levels against crude futures in a month, as prompt supplies of the feedstock tightened amid low crude runs at Gulf coast refineries that are again facing fresh storm threats.
US Gulf coast low-sulphur VGO barges traded at $7.13/bl above WTI futures yesterday, marking the highest level since early September.
Low crude runs have tightened VGO supplies over the past few months, and could be set back further by tropical storm Delta, expected to make landfall some time mid-week as a hurricane, likely in Louisiana.
VGO is a direct product of crude distillation units, and is fed into secondary units such as fluid catalytic crackers (FCCs) and hydrocrackers. The US Gulf coast is structurally short VGO, which provides a market for importers and refiners with excess capacity to trade the intermediate feedstock on the spot market.
The low crude runs have resulted from economic run cuts due to low refining margins. Low margins have forced shut the 136,000 b/d Calcasieu refinery in Louisiana in early August, removing at least 500,000 bl per month of VGO supplies from the US market.
The refinery run cuts kicked up a notch last month when several storms forced temporary shutdowns, many of which persisted for weeks because of power outages. Phillips 66's 260,000 b/d Lake Charles, Louisiana, refinery was heard to have restarted only last week after shutting in late August ahead of Hurricane Laura. Citgo's 425,000 b/d refinery in the same area is not expected to restart until mid-late October.
Furthermore, refiners with planned maintenance this fall may opt to keep crude and secondary units out for longer than normal, given low margins.
While low crude runs trimmed VGO supplies, better FCC margins kept demand high for refiners. Gasoline has shown the strongest recovery, while diesel and jet fuel remain weak. FCCs, being mainly gasoline-producing units, have seen higher throughputs than crude units.
This meant that refiners that would typically sell excess VGO production have instead been keeping the product within their own refining systems, which further limited availabilities for those seeking it on the spot market over the past few weeks.
In addition to refiners, demand for VGO has also come from marine fuel blenders. But only a small percentage of VGO — specifically grades with low paraffins — are suitable for blending low-sulphur fuel oil compliant with the 0.5pc sulphur cap the International Maritime Organization (IMO) put in place at the start of 2020.
Not all bull
Supplies are tight, demand is high, but VGO is not without competition, and the bullishness is relative. As distillates margins continued to erode, ultra-low sulphur diesel (ULSD) has become an unlikely competitor to VGO.
Gulf coast Colonial pipeline ULSD has averaged a discount of 0.68¢/USG below VGO in the two weeks ending 2 October, compared to premiums of 0.24¢/USG during the two weeks prior and 9.96¢/USG during the same period in 2019.
Deeply discounted ULSD has become a viable alternative to VGO as a feedstock for FCCs. Refiners have been cracking finished diesel in an attempt to convert more ULSD to gasoline. The practice is expected to continue through the rest of the year, sources say. Prior to cracking finished diesel, refiners were already tilting production away from distillates in the distillation process.
In addition to competition from distillates, VGO's current strength could also be tempered by incoming cargoes from Europe. The arbitrage for importing European VGO to the US Gulf coast opened last month after being shut all summer, aided by cheaper freight rates. At least three VGO cargoes arriving in October were procured directly from the European market. Other October VGO cargo availabilities were heard committed within the past week, steering the cargo market back to tight.
