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How Traders Should Buy and Sell Refinery Gasoil

By Optimization Specialist Robert

Jun 20, 2016
 

Understanding the fundamental market and quality drivers behind refinery gasoil pricing is key to maximizing value capture.

 
 

Often times a disconnect exists between your refinery trader and process engineer.  Many traders do not understand how gasoil qualities affect process units, while many process engineers do not understand how market forces affect the price of gasoils.

 

Since commercial traders don’t like reading technical articles to improve their competencies, this article is meant to educate refinery engineers.  Making process engineers more savvy in refinery economics proves to be a great way to leverage knowledge.

 

Let’s start with some basic concepts:

 

  • Majority of the gasoil sold in the market is derived from crude, and can be a combination of several streams
 

-  Heavy Atmospheric

   Gasoil (HAGO)

-  Light Vacuum Gasoil

   (LVGO)

-  Heavy Vacuum Gasoil

   (HVGO)


  • There are also cracked gasoils produced from Cokers and FCCs, but these streams are discounted due to poor qualities

 

 

  • The acronym “VGO” is often used to reference gasoil
 

-  It can mean Vacuum Gasoil or Virgin Gasoil (i.e. non -      

   cracked), but they are often interchanged

-  While “Vacuum” and “Virgin” gasoils can be misnomers, 

   don’t worry too much about terminology and just focus

     on the qualities

 

  • Gasoils have several uses, from marine fuel oil blendstock to unit feedstock
 

-  The most common use of gasoil is for FCC feed

-  Gasoil has historically traded as a differential to the 70/30,

   but in recent years been marked to WTI as well

 

  • Gasoil intermediates exist in the open market because there are structural gaps between refineries that produce and consume gasoils
 

-  Some refineries constructed or debottlenecked refinery crude

   capacity far in excess of downstream cracking capacity,

   resulting in net VGO sales

-  Other refineries built cracking capacity (both Catalytic and

   Hydro) in excess of crude, thus resulting in net VGO

   purchases

 

 

Understanding the disposition of gasoils in the market helps refiners extract the most value out of purchases or sales.  To clarify my thoughts further, let’s assess each of the main points above.

 

 

Gasoil Market Disposition

 

It’s important to recognize one fact when trading gasoils:  the most common use of gasoil is for FCC feed.  This not only sets the base marker price of gasoil in parity to the 70/30, but it also decides the differential relative to the 70/30.  The 70/30 is just a weighted average of the market prices of gasoline and diesel for a given region. 

 

 

  70/30  =  70% * (Price of Gasoline)   +   30% * (Price of Diesel)

 

 

The 70/30 is a fair representation of FCC yields as roughly 50% of the product yield in a FCC is gasoline and 15% is distillate (LCO).  Although FCCs also produce fuel gas, olefins, and bottoms, the 70/30 is a rough simplification since the value of lower priced products are offset by the volume expansion factor in the unit. 

 

While the 70/30 is the base reference price, traders add premiums or discounts to the 70/30 based on other market factors.   We call this the “differential” to the 70/30, and this ultimately decides the final trade price of a market gasoil.   A couple of examples differential adjustments can be:

 

  • If the price of natural gas declines relative to crude price, the discount to the 70/30 increases (i.e. the price of gasoil gets cheaper)
  • If the price of Diesel increases faster than the price of Gasoline, the discount to the 70/30 increases
  • Alternatively, if the price of Gasoline increases significantly above that of Diesel, then the discount may shrink, or there may even be a premium added to the base 70/30 price

 

It’s important to understand the fundamental drivers of gasoil prices regardless of your intent in trading gasoils.  Whether you have interest in purchasing gasoil as Hydrocracker feed, FCC feed, or for bunker blending, it’s important to understand what others are willing to pay for that gasoil.  This will determine if you have any leverage or not. 

 

The illustrate, let's comparing two buyers, one looking for FCC feed and the other looking for Hydrocracker feed. 

 

Since hydrocrackers produce a higher ratio of distillates (i.e. 40 – 50 %) as compared to 15% on

 

 

the FCC, the relative price of gasoline to distillates will favor one buyer over the other. 

                 

In a market where gasoline prices are significantly higher than diesel prices, the trader purchasing VGO as FCC feed will have a more favorable position compared to the trader purchasing gasoil as Hydrocracker feed.  The converse will hold true when market gasoline and distillate prices invert. 

 

 

Gasoil Qualities

 

Not all gasoils were created equally, so it’s absolutely critical to understand the quality of your gasoil regardless if you are buying or selling.  The quality with the highest visibility is sulfur as there is a very liquid market for varying gasoil sulfur.  Nominally speaking, the price difference between a High Sulfur VGO vs a Low Sulfur VGO is $3 /bbl. 

 

While the price impact of sulfur on gasoils is fairly transparent, other qualities aren’t so much.  Let’s take Aniline as the next example.  Most FCC engineers know that aniline point can be a good surrogate of measuring FCC feed quality, but most traders do not know how to correlate trade price as a function of aniline measurement.  Higher aniline will result in increased FCC conversion, and for my refinery I equate 10 deg Aniline change to $0.75 /bbl impact on FCC yields.   

 

As one last example of understanding quality impacts, I’ll discuss carbon residue, or coke formation tendency.  There are several different test methods to calculate carbon reside: 

 

  • Conradson Carbon Residue (CCR)
  • Ramsbottom Carbon Residue (RCR)
  • Micro Carbon Residue (MCR)

 

Different refiners may prefer different test methods, but essentially they all indicate the same thing.  Since FCCs are heat balanced machines, feed carbon residue is extremely important to know when trading VGO stock.  Most optimized FCCs operate at an air limit, so significant variations in feed carbon residue can result in significant operational changes, primarily feedrate reductions. 

 

Traditional gasoils derived from HAGO, LVGO, or HVGO should have minimal carbon residue content, but some refiners slip atmospheric tower bottoms (ATB) into gasoil sales streams and contaminate the VGO.  A distillation analysis of this stream may not reveal the true nature of the gasoil, but measuring CCR or MCR will be a saving grace.  1% variation on gasoil CCR can change gasoil pricing by $2 /bbl. 

 

There are dozens of other impurities that can be measured, such as nitrogen, nickel, sodium, and vanadium, so just recognize that there are a lot of factors that can affect the price of market gasoils.  The table below summarizes general ranges of qualities as well as rules of thumb on estimated price impacts.

 




Typical Range

Value Impact
Per

Sulfur - %
1 - 3

$3   / bbl
1.5 %

Aniline - deg F
180 - 200

$0.6 / bbl
10 deg F

CCR - %
0.1 - 1.5

$2   / bbl
1 %

Sodium - %
0.2 - 1.2

$0.7 / bbl
0.5 %



Refinery Configuration

 

Leveraging refinery configuration is also an important factor when trading gasoils.  The more you know about your own refinery configuration or a competitor’s can additionally improve your leverage.   The following table can be a useful tool.

 


 


Supply & Demand

 

While all of the other factors discussed can have significant influence on the price of traded gasoils, the most important factor is always market fundamentals (i.e. Supply & Demand).  In an ideal world where Supply and Demand are well balanced with high volume of trades, price variations will often follow factors such as qualities and transportation costs.

 

Unfortunately, refineries exist in all locations, and many do not have well balanced supply and demand.  Some refineries produce more gasoil than can be consumed locally, while others have gasoil appetites higher than local supply.  In steady-state operations the structural gaps can manifest in higher transportation costs, but in abnormal conditions this can really translate to significant discounts or premiums.  Traders who have supplied refineries during Turnarounds or unplanned shutdowns know how much fun that can be! 

 

As geopolitical, economic, and regulatory factors progress, gasoil supply and demand fundamentals have shifted.  Some events have increased the demand of market gasoil, while other events have reduced the supply.  An interesting academic exercise one can pursue is to track the price of VGO over the past 5 years.  Key events to note include the following:

 

  • Increase in global distillate demand starting in 2005
  • Decrease in North America gasoline demand starting in 2008
  • Closure of Hovensa St. Croix refinery in 2012
  • Increased Hydrocracker expansion in US Gulf Coast
  • Increased synthetic crude production from Canada and Venezeula

 

 

At the end of the day, the price of gasoils will vary quite significantly.  They can trade at a discount of $10 /bbl to the 70/30 or they can trade at a premium of $10 /bbl.  There are numerous factors that influence the price, and your job as an engineer, planner or trader is to maximize the value of your commodity.  Regardless if you buy or sell, it’s important that you take into account all of the factors discussed above.

 
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  • Paul Stobbe :   Very well written, do you have a similar position on hydrocracker drag oil?

    May 22, 2013

  • Anna Popova :   Thank you so much for posting this. It covers this gary field that exists at every factory ... it would be great to see something similar on straight run fuel oil as refinery feedstock.

    May 23, 2013

  • Optimization_Specialist Robert :   @Anna, I'll plan write an article on SR resid economics sometime in the near future - thanks for the thought. @Paul, can you please clarify what you mean by drag oil - it's not a term that i'm familiar with. Thank you both for the comments.

    May 26, 2013

  • George Ben :   great article. love the break down of hte commercial and technical fundamentals! Keep this type of material coming.

    Aug 04, 2013

  • Paul Stobbe :   Hydrocracker drag oil is the bottom product of the unit’s main fractionator. The yield is 2 to 5% of the unit’s charge. I was curious as to the typical disposition of this stream. This stream can be problematic if blended to fuel oil with a high as

    Aug 07, 2013

  • Optimization_Specialist Robert :   Paul, the frac bottoms is often fed to the FCC. Not the greatest yields compared to typical gasoil, but it's not a bad alternative for achieving additional light product yield.

    Aug 07, 2013

  • Sarp :   Very useful information on the economics of VGO. Well done.

    Aug 16, 2016

  • Pavol Fehér :   It is a good material, however, I recommend to add RHC (residue hydrocrack) process, too. There are several problems with metal content in GO.

    Nov 06, 2016

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