FocusUS Gulf refiners caught in low-sulphur vacuum gas oil squeeze

26 October 2010 00:26  [Source: ICIS news]

By Sheena Martin

HOUSTON (ICIS)--US Gulf refiners are being squeezed during the turnaround season amid higher-than-normal premiums for low-sulphur vaccuum gas oil (VGO) relative to gasoline prices, a trader said Monday.

VGO boosts gasoline output and is relied on by Gulf coast refiners to continue gasoline production when a crude unit is out or at reduced rates.

Recently, however, the price for gasoline per barrel has been equal to or less than the price for low-sulphur VGO per barrel. That means refiners were loosing money on processing VGO bought in the spot market.

The price for VGO usually follows gasoline prices. As gasoline demand and prices go up, so do VGO prices. But prices for gasoline fell at a sharper pace than crude at summer’s end, while VGO maintained a significant premium.

East coast refiners have captured cargoes of low-sulphur VGO and gobbled up the product. This has choked off the Gulf coast from a significant supply source, and propped up VGO prices, sources said.

Despite the low-to-negative profit margin for processing low-sulphur VGO, refiners have no choice during turnaround season because of customer supply contracts.

In addition, the east coast buyers are limited to using low-sulphur material because they lack the level of complexity and sophistication to process high-sulphur fuels.

The biggest buyers on the east coast have been ConocoPhillips, Hess and Sunoco.

With its Bayway facility at Linden, New Jersey, ConocoPhillips has always been a big buyer on the east coast, according to traders.

According to market sources, this refinery recently underwent maintenance on its crude distillation unit, which produces VGO. In the past two months, the company reported that a compressor failed and reported maintenance on the crude unit.

In order to continue gasoline production during the crude unit maintenance, ConocoPhillips bought low-sulphur VGO, sources said.

ConocoPhillips did not immediately respond to inquiries by ICIS.

Hess’ Port Reading refinery in New Jersey has also been a big buyer lately, sources said. The company produced and marketed high-sulphur material from its St. Croix refinery in the Virgin Islands, while buying VGO for east coast production, traders said.

Hess spokeswoman Lorrie Hecker said the New Jersey refinery had a minor maintenance issue earlier in October did not impact production.

Finally, Sunoco had expressed interest in low-sulphur product for its Philadelphia refinery in Pennsylvania, VGO traders said.

Traders said these three east coast facilities can only process light, sweet material so using high-sulphur VGO is not an option.

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By: Sheena Martin
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