Viewpoint: Refinery runs to drive US VGO 2021 markets

Planned and unplanned crude unit maintenance kept US vacuum gasoil (VGO) markets tight for much of 2020. The threat of more refinery closures is hovering over the market going into 2021, with another wave of Covid-19 cases leading to fresh lockdowns across the country.

The second half of 2020 has already seen two major VGO suppliers exit the market. Calcasieu Refining idled its 136,000 b/d facility in Louisiana in August. Phillips 66's 250,000 b/d Alliance refinery in Belle Chasse, Louisiana, segued from maintenance work in September into a temporary shutdown through the end of 2020.

These shutdowns were driven by weak crude margins. The Gulf coast 3-2-1 crack spread, calculated using Colonial pipeline conventional gasoline and diesel against WTI crude in Houston, averaged $6.45/bl from April to November this year, less than half of the $13.33/bl during the same period in 2019.

Calcasieu Refining alone supplies approximately 500,000 bl of low sulphur VGO to the Gulf coast market each month, depending on operating rates. The removal of these barrels — typically all termed — tightened the market significantly at a time when a string of hurricanes began taking down Lake Charles, Louisiana, refineries.

Citgo's 425,000 b/d Lake Charles refinery was shut for more than two months in the aftermath of Hurricane Laura. Phillips 66's Alliance refinery entered a precautionary shutdown ahead of Hurricane Sally in September, which led to prolonged maintenance and then a temporary economics-driven closure.

Not all shutdowns are bullish for VGO. Shell's 228,000 b/d Convent, Louisiana, refinery closure turned a reliable VGO buyer on the Mississippi river into a seller in the fourth quarter.

Crude runs are likely to remain low in the first quarter of 2021, even as vaccine developments hinted at possible fuel demand recovery later in the year. Gulf coast refiners are unlikely to bring run rates back into the high 90-percentile range until demand for jet fuel recovers.

The VGO market balance will depend on how secondary unit operations will stack up against crude runs. The current shortage is caused by higher runs at fluid catalytic crackers (FCCs) compared to crude units. Sustained demand recovery will restore balance to these units and replenish VGO supplies.

But the Gulf coast area will likely remain net short in the next year, providing a continued opportunity for exporters in Europe. European arbitrage cargoes to the US had been spotty throughout the pandemic, hampered by fluctuating refinery operating structure in that region as well as freight rates.

Fresh Covid-19 lockdowns in Europe renewed interest in shipping to the US in December despite closed arbitrage. The longevity of these lockdowns could affect this flow in 2021.

Bunker fuel blending adds uncertainty

Demand from bunker fuel blenders were a major source of demand for VGO, particularly low-paraffinic grades, for much of 2020, replacing some of the lost demand from refiners when FCC margins were thin. The same factors that will boost VGO supply — higher crude runs and fuel demand — will also promote the production of low-sulphur fuel oil (LSFO), and therefore diminish demand for blending components such as low-paraffin VGO.

Bunker demand for VGO was not impacted by the Calcasieu shutdown that rocked the VGO world — the Calasieu grade was considered unsuitable to blend 0.5pc sulphur LSFO because of its high paraffinic content.

As long as crude runs remain low, bunker fuel blenders are likely to continue competing for limited VGO supplies with refiners, at least through the first quarter of 2021.

By Daphne Tan