High Oil Prices Send U.S. Refiners Scouring for Alternatives

(Bloomberg) -- Skyrocketing crude oil prices have prompted cash-strapped U.S. refiners to look for alternative ways to maximize gasoline production during the peak of the summer driving season.

The fuel-makers are buying low-sulfur vacuum gasoil, or VGO, from abroad as a more economical option to maximize fuel production without increasing crude intake. As a result, VGO prices are at the highest since October 2018, with imports coming to the U.S. from as far as the Black Sea to meet demand.

“This year in particular with gasoline demand expected to be stronger than middle distillate, diesel, gasoil, jet, you could see refiners opt to import VGO to run through a cat cracker if the price is right,” Chris Barber, principal analyst at ESAI, said by email. “It would allow them to produce gasoline without a lot of additional diesel or middle distillate.”

More than a year after the pandemic decimated fuel markets gasoline demand is recovering, with pump prices at a seven-year high as Americans return to offices and embark on summer road trips. Refiners are facing a limited window to capture profit and build up gasoline inventories ahead of what could possibly be a severe hurricane season that could lead to unplanned shutdowns.

With crude futures up about 50% so far this year, refining centers from Delaware on the East Coast to all along the Gulf Coast, from Pascagoula, Mississippi, and Texas City, Texas, are importing VGO, shipping data compiled by Bloomberg show. West Texas Intermediate futures were trading near $75 a barrel in New York on Friday.

That popularity of VGO imports may subside soon. VGO is worth about $81 a barrel, about $6 more than West Texas Intermediate futures. Consequently, refiners may be less likely to buy VGO and instead rely on their crude units to make the feedstock.

Soaring crude values have decimated crude topping margins globally, according to London-based consultancy Energy Aspects. Meanwhile, conversion unit margins like those from fluid catalytic crackers (FCCs) remain strong, buoying feedstocks demand from refineries seeking to leverage those units.

“Refiners will seek to extract margin as much as possible, from lower cost feedstocks than crude to these specific complex units,” said Zachary Rogers, director for Global Oil Service at Rapidan Energy Group.

The potential for profit from using VGO remains strong. Prompt cash-market gasoline in Houston for shipment on the Colonial Pipeline, which spans the eastern part of the country, was trading about 25 cents per gallon higher than the feedstock late this week.