European vacuum gasoil (VGO) prices could find support in 2023 owing to tightened supply in the region, with few obvious alternative sources once the EU's ban on Russian exports comes into effect in February.
The EU ban on Russian oil products, effective early February, will cut away at all remaining VGO flows from that country into the vast majority of the continent. The February deadline will cover remaining term contract deliveries.
A halting of spot purchases and widespread self-sanctioning in Europe since Russia invaded Ukraine in February 2022 has already cut away at flows, although overall imports fell this year as European refiners coped with alternative configurations, the bulk still came from Russia.
By the end of 2022, the EU will have imported more than 6mn t of VGO, 5.4mn t from Russia and 497,000t from Saudi Arabia, according to Vortexa. This compares with a total of 8.9mn t in 2021, of which 97pc came from Russia and none at all from Saudi Arabia.
But the rise of Saudi Arabian exports into Europemight be short-lived, as the country's 400,000 b/d Jizan refinery is only exporting VGO while its secondary processing units are not yet up and running. The plant's hydrocracking units are due to come online in 2023, which could cut its high-sulphur VGO production, according to traders.
Europe's refiners will therefore be looking for other alternative VGO supplies, but competition could be fierce. Portugal's Galp has sated its 220,000 b/d Sines refinery's VGO demand mainly with Saudi Arabian supply since March — with imports totalling 382,000t — after it said it would make no new purchases of Russian products after the outbreak of war in Ukraine. The firm is a major VGO buyer in western Europe, and it is unclear how it would adopt to a drop in Saudi loadings.
All eyes on India
One source of alternative supply could potentially be India. Portugal's Galp was awarded a cargo of VGO from the 1.254mn b/d Jamnagar refinery complex in November during a period of secondary unit maintenance at the plant. India could export feedstocks to Europe next year if it is economical to do so, potentially by processing Russian crudes under the price cap.
This could be the case from other third-party countries too, although it would likely remain more profitable for them to produce finished products such as diesel — which Europe will be critically short of next year — and export those to the continent, rather than intermediary feedstocks such as VGO.
European market participants have poured cold water on the prospects of steady VGO loadings next year. Some have suggested that most restricted-origin — non-Russian sources — VGO in the European spot market in 2023 will by produced as a result of refinery maintenances, or other imbalances.
VGO could also be in shorter supply in Europe if the region's refineries have to adopt a lighter crude slate in response to sanctions on Russia's mainly medium sour crude exports, as this will push yields of residual fuels in crude distillation unit (CDU) processing down. Europe's crude import slate was 38.6pc light sweets in November, according to Vortexa, the highest since September 2021.
But Russian VGO will not be gone from all of Europe after the EU allowed some sanctions exemptions, which could help ease some of the competition for European firms. Bulgaria is permitted to buy all Russian oil products and crude until the end of 2024, while Croatia can continue importing Russia VGO to feed its sole 90,000 b/d Rijeka refinery until the end of 2023, although the plant will be closed until April for maintenance.
Sulphur spread shock
The shift in oil products trade in Europe could also impact other VGO pricing spreads. Some traders have suggested that the spread between high and low-sulphur VGO could narrow next year, as expectations of astronomical diesel margins should buoy high-sulphur VGO demand. Conversely, a drop in very-low sulphur fuel oil (VLSFO) demand, and a bleak outlook for European gasoline this winter because of local oversupply and lower consumption, could squeeze economics for processing low-sulphur VGO. Restricted-origin diesel cargoes averaged $49/bl premiums against North Sea Dated in November, while gasoline averaged just $11.22/bl against Dated.
