VGO spot premiums tumble on lower gasoline profits

16 November 2011 18:27  [Source: ICIS news]

HOUSTON (ICIS)--Vacuum gas oil’s (VGO) premium to crude narrowed to an eight-month low as falling gasoline prices continue to make VGO for gasoline production less profitable, said market traders on Wednesday.

Low-sulphur (0.5% maximum) VGO was assessed at $19/bbl over West Texas Intermediate (WTI) crude, the first time the premium was less than $20/bbl since 25 March. Some traders said VGO could be as low as $16/bbl. The VGO premium on 25 March was $18.50/bbl.

VGO is traded in the spot market at a premium to WTI crude.

Spot market VGO premiums slipped because it has become increasingly less profitable to produce gasoline. VGO is the feedstock for fluid catalytic crackers, which produces catalytic gas, the primary blendstock for motor gasoline.

Buyers will remain cautious and only buy VGO on an as-needed basis, traders said.

For refineries processing WTI crude, the profit for gasoline production was $9.23/bbl on 15 November. If a refiner purchases spot VGO to produce gasoline they are spending more on the VGO than the gasoline is worth.

On 25 March, gasoline profits for refiners were $22.47/bbl. VGO was priced less than the worth of gasoline, yielding a profit for refiners.

Buying of spot VGO has been scarce because it is unprofitable for refiners. This has also made the spot price of VGO hard to determine.

On 15 November, gasoline futures were $2.5857/gal and WTI was at $99.37/bbl. On 25 March, gasoline futures were at $3.0445/gal, and WTI settled at $105.40/bbl.

In the short term, gasoline profits are not expected to strengthen, said analyst Phil Flynn with PFGBest. As refiners increase distillate production, the inventory glut for gasoline will increase. Demand has been unseasonably low, at 5.7% under consumption levels for this past month of 2010, according to the US Energy Information Administration (EIA).

VGO premiums are likely to remain low and fall further because there is little demand to produce more gasoline and little profit to be made from it, market sources said.

By: Sheena Martin
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