Brent-WTI price gap pinches US vacuum gas oil imports

21 January 2011 22:47  [Source: ICIS news]

HOUSTON (ICIS)--The arbitrage for vacuum gas oil cargoes from Europe is all but closed as a result of the growing price gap between European and US benchmark oil prices, a trader for a major petrochemicals and refining company said on Friday.

The price of vacuum gas oil, which is used to produce gasoline, is tied to crude oil values. Large swings between Brent crude and WTI (West Texas Intermediate) can affect vacuum gas oil trading.

The spread between the March contract for NYMEX WTI (West Texas Intermediate) and higher-priced Intercontinental Exchange (ICE) Brent was about $7/bbl most of the week. That compares with December when the spread was $1.67/bbl. This has made importing crude oil and associated products such as vacuum gas oil from Europe costly.

The weakening of WTI prices compared with Brent might be the result of growing supply from the Cushing hub in Oklahoma, according to some analysts. Supplies at the hub were reported at 9.2% higher than this time last year, according to the Energy Information Administration (EIA).

Transportation in Europe is largely based on diesel fuel, so US refiners usually purchase the excess vacuum gas oil produced in Europe. With more than 6.3m bbl/day of fluid catalytic cracker (FCC) capacity to produce gasoline, the US is a dumping ground for vacuum gas oil.

“The barrels have to come here eventually,” a feedstocks trader said. “The US has the most FCC capacity and Europe can’t run all their vacuum gas oil.”

Still, Europe would soak up as much vacuum gas oil as possible before selling product at a loss.

Supply of vacuum gas oil has been tight on the Gulf coast because US refiners cannot afford the more expensive cargoes from Europe, and European sellers do not want to drop the selling price if possible. The price blowout between WTI and Brent crude grades added significantly to the premium for vacuum gas oil over WTI crude.

In the week ended on 14 January, the premium for US low-sulphur (0.5% maximum) vacuum gas oil cargoes over February crude oil contracts jumped to $10/bbl from about $7/bbl. And this week, cargo prices continued surge to premiums of about $14/bbl over the February contract for WTI.

Furthering the jump in prices, European cargoes are considered higher quality product than domestically-produced vacuum gas oil and therefore more appealing on the Gulf coast, said the trader for the petrochemical and refining company.

US refiners process poorer grades of crude than overseas; therefore the vacuum gas oil available domestically has lower American Petroleum Institute (API) gravity, higher metal content and lower aniline specifications.

Feedstocks traders said they did not have a clear idea of when the supply would ease or how wide the WTI-to-Brent spread would go. Based on current futures contracts, delivery of WTI crude is cheaper than the respective Brent contract for years into the future.

“Supply out of Europe [of vacuum gas oil] needs to clear at some point, so I expected we will just continue to see premiums rise until we get no FCC margin,” a refining trader said.

The FCC margin would be zero or go negative if premiums for vacuum gas oil over WTI crude became so expensive that refiners were losing money when they purchased spot gas oil to process.

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By: Sheena Martin
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