Stabilized US refinery operations in 2022 could level out the uncertain vacuum gas-oil (VGO) demand caused by weather events this year, but not until after an active turnaround schedule in the first quarter.
Demand for VGO as a refinery feedstock in 2021 struggled to emerge from the prior year's recession as Covid-19-related lockdowns abated — only to face multiple refinery outages brought on by a deep freeze in February and an active storm season in the latter half of the year.
VGO, which is a feedstock for refinery fluid catalytic crackers (FCC), had a slow demand recovery following back-to-back weather-related issues. Secondary refinery units such as FCCs typically lag crude units in a normal restart timeline.
The largest casualty of the two major weather events of 2021 — the Texas freeze in February and Hurricane Ida in August — was Phillips 66's Alliance refinery in Belle Chasse, Louisiana. Flooding caused by the hurricane resulted in extensive damage and a prolonged downtime, which ultimately led to a permanent refinery shutdown. Phillips 66 said the facility will be converted to a terminal in 2022. The Alliance closure will eliminate one more participant from a shrinking VGO market.
The abrupt refinery shutdowns caused by the freeze in Texas earlier in the year felled facilities stretching from Port Arthur to Corpus Christi as power failures lingered, crimping demand for feedstocks such as VGO and naphtha in the following months.
Spring refinery turnarounds seem to be more skewed to FCC maintenance starting in the first quarter of 2022, which was bearish for VGO demand and values.
Several refineries in Corpus Christi, Texas City and Port Arthur in Texas should embark on FCC work before the end of the first quarter of 2022, along with a Louisiana refinery on the Mississippi River.
A Corpus Christi refiner has already issued a mini-term tender to sell up to 1mn barrels of low sulphur VGO within the January to February time frame, in conjunction with planned FCC work. This supports anticipated increased VGO supply early next year.
Low refinery utilization limits VGO
Hurricane Ida, which made landfall late August on the Louisiana coast, sent US refinery utilization to the lowest in five months. Strong VGO demand and prices in Europe limited typical exports to the US in the second half of the year, but diminished Gulf coast VGO demand as a result of struggling refinery operations balanced out the reduced flow.
Low VGO values following the February freeze sent prices below low sulphur fuel oil (LSFO) in March as a result of low refinery utilization.
VGO prices resumed premiums to LSFO in May this year and remained higher for much of the second half of 2021, except for the period between September and October following the hurricane, thus minimizing the flow into the marine blending pool.
In December, the low sulphur VGO premium to LSFO narrowed to under 50¢/bl. The bearish pricing outlook for VGO on FCC turnarounds could flip the relationship come the first quarter.
Going forward
LSFO has the potential to pull ahead of VGO prices in 2022 amid ongoing FCC shutdowns which typically bodes less VGO consumption and incremental barge sales.
Low sulphur blending components for the International Maritime Organization (IMO)-compliant bunker fuel specifications remained tight near the end of the year, which suggests room for LSFO values to grow.
Strong refining margins in Europe and the Asia Pacific could pull VGO supplies away from the US in the beginning of 2022, which is typically a net importer of VGO. European margins remain high and this scenario is expected to persist in the shorter term, which would discourage arbitrage movements to the US.
Asia Pacific refining margins were robust as well, with the region attracting Skikda straight-run (SR) cargoes from Algeria. US buyers seeking Skikda cargoes in December were thwarted by continuing draws out of Asia.
Asia has already been pulling some Saudi Arabian high sulphur VGO out of the Jizan refinery away from the US in 2021. Initial sales of the Jizan VGO had been mostly to the US.
