Drivers of gasoline-powered cars could be about to face an unexpected source of competition when filling up at the pump: merchant ships.
While giant freighters aren’t about to start running on the world’s main automotive fuel, they will have to start emitting less sulfur into the air in 13 months’ time to comply with new regulations. And when that day comes, vacuum gasoil — an oil refinery product that today often gets reprocessed into gasoline — may well be diverted to make shipping fuel.
“Components that were dedicated towards the production of gasoline will now be dedicated to making shipping fuels,” said Jan-Jaap Verschoor, director of Oil Analytics, a firm that tracks margins across the global refining industry. He expects refiners to make technical changes to their gasoline making units, thereby churning out less.
A jump in competition for VGO, as it’s known, might even hinder production — and support prices — of gasoline, a once-star product for oil refineries that’s been losing the plants money this year. It would also mark the latest addition to a list of secondary impacts from sulfur-reduction rules set out by the International Maritime Organization, which begin in January 2020.
The world’s refineries churn out about 16 million barrels a day of VGO, making it among the industry’s biggest products. Just under half gets reprocessed to make things like gasoline, according to Wood Mackenzie Ltd., an energy consulting firm.
From January 2020, though, the feedstock could become an important ingredient in making something called very low-sulfur fuel oil, a new product with 0.5 percent sulfur that will help owners comply with the IMO’s rules. More VGO could also be used to make marine gasoil — a different type of marine fuel already in use — for which demand is expected to soar by about 2 million barrels a day, according to Energy Aspects Ltd.
At current prices, VGO and another feedstock called low-sulfur straight-run fuel oil would probably be used to make shipping fuels, rather than being upgraded to make gasoline and other products, according to David Bleasdale, an executive director at consulting firm CITAC who has more than 25 years’ experience in the petroleum industry. In normal conditions, though, VGO and low-sulfur straight-run fuel oil would be upgraded rather than used for shipping fuels, “so that sort of suggests it will swing with the seasons,” he said.
The vital question is one of scale: how much VGO will actually get diverted to making shipping fuels? The answer will depend on — and help dictate — the margins companies can make from selling gasoline. Forecasting, though, is difficult: refiners will be looking at a complicated set of moving prices that are all influenced by each other, trying to decide what’s most economical.
“The whole pricing regime is going to be massively volatile,” said Alan Gelder, vice president for refining, chemicals and oil markets at Wood Mackenzie. “You’re altering the balances of gasoline, diesel and very low-sulfur fuel oil, all of which are competing in different sectors, and how they price alters the value of VGO, it alters crude differentials…the lot.”
Partly because of the uncertainty over how much VGO will get diverted into shipping fuels, analysts are split over what will happen to gasoline margins from 2020. This comes at a time when the gasoline market is on its knees. Margins plummeted this autumn thanks to U.S. stockpiles that are still at seasonal records and demand growth described as “puny” by the IEA. For almost all of November, gasoline in Europe was cheaper than the crude it’s made from, an almost unprecedented situation.
Looking forward, the bearish view for gasoline sees a globally lightening crude slate making it harder for refiners to avoid production of the road fuel — a situation that could be exacerbated if OPEC decides to cut output again when it meets Dec. 6.
“The additions we see coming into the global crude slate are predominantly light – including the large upticks in U.S. supply,” says Eugene Lindell, who leads downstream analysis at JBC Energy GmbH. What that means is that initial refining yields from the global crude slate will include incrementally more naphtha and gasoline than gasoil or residual fuel oil.
At the same time, shippers are expected to use more diesel-based fuels come 2020. The refining industry is subsequently expected to maximize distillate output, making more gasoline at the same time. That’s one of the reasons why Woodmac expects gasoline margins to be weaker in 2020 than in 2019.
However, depending on how refiners adapt to IMO 2020, any expected hit to gasoline margins may not transpire.
Because diesel-like fuels will be one of the main options for complying with IMO 2020, plants will likely maximize their yields of that sort of fuel, thereby making less gasoline, said Steve Sawyer, a senior analyst at FGE. He also expects run-rates to drop at refineries’ main gasoline producing units, known as fluid catalytic crackers, which consume feedstocks like VGO.
“I would expect to see gasoline cracks to be reasonably healthy in 2020,” he said. “I don’t buy into this – ‘well, you’ve got a 1 or 2 or 3 dollar crack right now and you’re going to have that forever more’.”
Source: BloombergPrevious Next
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