Viewpoint: Long US VGO market may persist into fall

Prolonged fluid catalytic cracker (FCC) outages on the US Gulf coast in the first half of 2018 yielded ample VGO barges and a long market — a trend that may last deep into the third quarter thanks to other factors.

Multiple Gulf coast FCCs underwent planned and unplanned work, especially from April to June. Valero's 220,000 b/d Texas City, Texas refinery had a FCC down for more than a month. ExxonMobil had FCC maintenance at its 557,000 b/d Baytown, Texas, refinery and unplanned issues associated with a FCC at its 348,000 b/d Beaumont, Texas, refinery.

Brent crude premiums to Nymex WTI during that same period were also robust, rising as high as the $10/bl level in the first half of June, supporting VGO cargo premiums amid notions of elevated replacement costs of European VGO cargoes.

But lackluster VGO demand in Europe soon dispelled the bullish sentiment from healthy Brent premiums to Nymex WTI. US demand was also sporadic, as refiner buying was focused on cheaper prompt barges emerging from ongoing FCC work.

Diminished demand out of Venezuela because of ongoing refinery problems, as well as legal and credit issues surrounding US exports to the country, also contributed to lower VGO demand in the US. Any reduction in Venezuelan offtake of VGO from the US has not been affirmed by the parties associated with this flow. However, the lower demand from Venezuela is not expected to change in the coming months, leaving a pall over US export activity.

Changing dynamics in the domestic US VGO market also points to declining spot buying interest in the VGO market. VGO demand did not rebound much entering the summer months, possibly because of higher crude runs, which means refiners can fulfill more VGO demand within their own systems.

VGO storage tank capacity also appears to have increased on the refiner side. One major Texas refiner's shift to trading VGO alongside process optimization activities appeared to have reduced its reliance on spot purchases. The refiner added tankage for VGO for trading, which would also limit exposure to spot buying in the event of refinery problems.

Refiners that typically have regular intra-company cargoes from Europe to the US can allocate the cargoes better with increased storage.

Going deeper into the third quarter, the VGO market is in backwardation, in line with the forward Nymex WTI crude market. Thus cargo sellers would have the incentive to sell barrels already on the water versus putting the VGO into storage. This has led to more aggressive cargo offers in late July, effectively pushing cargo prices below barges again after a short turn at parity.