European vacuum gasoil (VGO) prices could find support again in 2022 with market expectations of lower Russian exports, just as in 2021, and the year's demand outlook could hang on a broader oil market recovery from Covid-19.
Russia's refinery upgrade programme is whittling away at VGO exports as more secondary units — which use VGO as a feedstock — are brought online to boost road fuels output. A number of upgrade projects are scheduled to come online in 2022, aimed at raising diesel production in particular. That will result in lower exports of high-sulphur VGO — the principal grade in Europe.
Baltic Sea and Black Sea VGO export loadings in the first 11 months of 2021 were down by 25pc and 19pc on the year at 300,000 t/month and 600,000 t/month, respectively. Exports may have been driven lower by a push to ramp up gasoline production for the Russian market, particularly in the summer when a booming domestic tourism sector boosted consumption. With the pandemic ongoing it is difficult to tell whether a similar phenomenon will occur next year, or if a recovery in international travel will ease the pressure on Russia's gasoline market.
Sanctions on Belarus' oil industry took further VGO away from the European market in 2021, and almost certainly will again in 2022. Northwest European export loadings in the January-November 2021 period were down by around 42pc from 2020 at 68,500 t/month, and Mediterranean region loadings were lower by 56pc at 15,000 t/month. Part of the reason for this is refinery shutdowns and closures caused by continually tough operating conditions in the Covid-19 era.
In combination, these lower supplies helped prop up and stabilise VGO prices throughout 2021, when delivered ARA high-sulphur VGO premiums to Ice Brent futures averaged around $5/bl. They did not drop below a $4/bl premium and did not rise above $6.25/bl. The same price averaged $3.25/bl in 2020, when volatility was significantly higher — the 2020 low was -$3.25/bl, and the high was +$11/bl.
Road to recovery?
How a likely reduction in supplies will be met by VGO buyers in Europe remains to be seen, although a lot will depend on how European oil products markets continue to recover from the Covid-19 pandemic. Rising vaccination rates could mean fewer lockdown measures in 2022 and a steadier recovery in road fuels consumption, which could boost refining activity and thus lift VGO demand.
The emergence of the Omicron variant in late November has prompted a spate of movement restrictions across the continent, but the IEA said in its December Oil Market Report (OMR) "the surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is underway."
Refinery closures could provide a ceiling even if demand does rebound — the IEA expects European OECD refinery crude throughputs to average 11.3mn b/d in 2022, still a long way short of the 12.2mn b/d in 2019.
The US is typically the key outlet for European VGO exports, and this will remain the case next year. The US took in an average of just 350,000 t/month in January-November 2021, down by 38pc from the 2020 monthly average. Secondary unit outages in the US Gulf coast — exacerbated by winter storms in February and a heavy hurricane season later in the year — weighed on VGO import demand in 2021.
European sellers have faced competition from the new 400,000 b/d Jizan refinery in Saudi Arabia, which has been exporting VGO since the start-up of its primary units in the summer. Operations at Jizan will ramp up in early 2022 though, which could curtail those exports as secondary units are brought online.
