Viewpoint: VGO sulphur spread may widen in 2020

Low-sulphur vacuum gasoil (LSVGO) is likely to gain higher premiums next year as bunker fuel blenders compete with refiners, which could potentially force fluid catalytic cracker (FCC) run cuts.

The International Maritime Organization's (IMO) 0.5pc sulphur cap for bunker fuel comes into effect on 1 January. LSVGO is part of the blending pool that can make up this bunker fuel specification.

Since October, bunker fuel blenders have had to pay premiums of $3/bl and higher for certain grades of LSVGO compared with similar product going into the refinery. Refiners, on the other hand, have struggled with seasonally low FCC margins throughout the last quarter of 2019, and cannot pay the blenders' premium for LSVGO.

This has created double-tiered pricing in the LSVGO market for different end use. Refiners purchasing LSVGO as FCC feedstock were paying about Nymex WTI +$12/bl for LSVGO barges at the Gulf coast in late December. In contrast, LSVGO sold into the IMO blending market has changed hands at Nymex WTI +$15/bl and higher.

Going into 2020, LSVGO premiums could rise to as much as $6/bl over high-sulphur VGO (HSVGO), as refiners compete with IMO blenders for available barrels. This could depress FCC margins to a point where it would be more economical to simply cut runs.

Earlier in the year, robust high sulphur VGO (HSVGO) demand attributed to healthy hydrocracker runs lifted prices above the LSVGO multiple times, reversing the typical sulphur spread.

LSVGO re-established premiums to HSVGO in the latter half of September, after the International Standardization Organization (ISO) finalized specifications for the low sulphur bunker fuel. Over the past year, LSVGO premiums to HSVGO have averaged in the Nymex WTI +$2/bl range.

But not all VGO qualities are suitable for IMO-blending. Bunker fuel blenders cannot accept higher paraffin product with over 30 pour. Optimum density is also pegged between 18-22° API. This in part could guarantee a bottom for FCC margins.

The outlook for HSVGO pricing is less clear. Robust HSVGO demand and prices in Europe bolstered prices in December, effectively limiting arbitrage flows to the US, thus keeping supplies slim. European imports were also hampered by rising freight values.

Much of the domestic HSVGO supply tended to be of less than generic quality, which did not match some local demand restrictions.

For much of July through late September, high sulphur values had been flat or higher than LSVGO because of healthy hydrocracker margins and thin availability of required product specifications. This turned around in the fourth quarter, with LSVGO rising to a high of $2.25/bl above HSVGO on 1 November.

By Daphne Tan