Venezuelan crude alternatives making better coke

US refiners seeking alternatives for traditional heavy sour crudes have turned to sweeter crudes from Latin America, resulting in better quality mid-sulphur petroleum coke.

The unexpected rise in supply of this grade could cut the premium for this coke, as most consumers have adjusted to take higher sulphur. But heavy maintenance in the US Gulf has so far kept overall volumes low and held supply and demand largely in balance.

Coke sulphur content in the US Gulf has trended higher for years now as a result of changing crude dynamics, forcing buyers to adjust to accept 5-5.5pc or higher coke.

Market participants expected this trend to become even more extreme following US sanctions on Venezuela, as Venezuelan crude is a key feedstock for mid-sulphur coke.

Refiners were confident they could source alternative heavy crudes following the sanctions. But buyers worried this would mean more qualities like heavy sour Canadian, which would result in more 6.5pc sulphur coke on the market.

Instead, curtailment orders on Canadian crude reduced the affordability of this crude in the market.

This is presenting a challenge for complex US Gulf refineries that typically rely on a deeper discount for these crudes to keep their coking margins strong.

"Who knew that heavy would be expensive," one market source said.

Some refiners have replaced these crudes with Latin American supplies. This has resulted in even better quality coke than was produced with Venezuelan supply, according to market sources.

During a quarterly earnings call in early May, PBF Energy said it was running less heavy and more light, sweet crude at its refineries, while also sourcing more sour crude from Colombia. Although this is still considered a sour crude, Colombian coke production is as low as 3pc sulphur.

Market sources confirmed that PBF's Chalmette, Paulsboro and Delaware City refineries were making better quality coke than before. The Paulsboro and Delaware City facilities do not produce mid-sulphur coke but were heard to have significantly improved their coke quality from last year's 7-8pc sulphur levels.

Heavy crude accounted for less than 30pc of total runs at PBF refineries in the first quarter of 2019, the lowest since 2016. But maintenance at Torrance and Delaware City affected throughputs.

Other refineries that had previously used Venezuelan crude are also making better quality coke, according to sources, as they replace some of this feedstock with Colombian and Brazilian crudes.

In the week ending 10 May, 26pc of all US crude imports originated from Latin America, according to data from the US Energy Information Administration (EIA).

Crude imports from Latin American countries — excluding Venezuela — rose by 17pc year to date when compared with the same time in 2018.

Extensive maintenance at many US refineries is likely the reason why the mid-sulphur coke premium has so far remained relatively stable despite this unexpected improvement in sulphur content. The premium for US Gulf coast 4.5pc to 6.5pc did fall to a two-year low earlier this year at $6.50/t, but it has since risen slightly to $8/t this week.

It remains to be seen how the unique situation of unusual crude economics and heavy maintenance will affect the supply and demand balance of mid-sulphur coke. Some buyers say that mid-sulphur offers have increased recently, suggesting higher availability. The US Gulf coast 4.5pc sulphur Argus price did slip by $1.50/t this week to $68/t, the biggest week-on-week drop since the 16 January assessment.

The current narrower sweet-sour crude spread is most likely a temporary development, driven not only by Venezuelan sanctions and tighter Canadian supplies but also Iran sanctions and Opec production cuts.

Some US refiners expect heavy sour supplies to rebound and the spread to again widen, especially with upcoming marine fuel regulations putting pressure on sour crudes.

But others are now beginning to question this idea. Marathon Petroleum recently halted a coker expansion project at its Garyville refinery in early May, saying that its view of the future of coking economics was no longer so positive.

"If the economics remain where they are, we will see less coke [of any quality] because refiners will run less crude," one market participant said.