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Seasonally strong diesel crack lends support to Houston VGO

Diesel cracks at US Gulf Coast refineries have bested 2016 levels heading into deep winter, lending support to the cash market for feedstocks and offsetting pressure on the supply side, S&P Global Platts data showed Wednesday.

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The crack for Colonial Pipeline ULSD against region-dominant Louisiana Light Sweet crude rose 83 cents Tuesday to an 11-week high $16.91/b, marking its seventh rise in the last 10 trading days.

From December 1 through December 26, the ULSD-LLS crack has averaged $14.66/b, compared with $13.63/b and $7.12/b in the same periods in 2016 and 2015, respectively, Platts data showed.

Gasoline cracks have outperformed 2015-16 levels, though not by the degree of ULSD.



The stronger cracks have offset ramped-up refinery production and high stocks to support vacuum gasoil barges at Houston.

"The refiners have enjoyed the margins this past year," a feedstocks source said. "It doesn't hurt that WTI is discounted to Brent by almost 7 bucks either. That helps with exports [of VGO from Europe to the US]."

The NYMEX February Brent futures contract was $6.86/b over the February WTI contract Tuesday.

VGO at maximum 2% sulfur (high-sulfur VGO) has held at least $10.50/b above front-month cash WTI for eight consecutive trading days through Tuesday. In contrast, the differential did not top $10/b all of winter 2016-17.

Lack of selling interest in the Gulf Coast has kept the differential from falling.

"I think the US markets are rebalancing fairly quickly, and [there are] very few domestic offers," a second feedstocks source said.

Also helping the diesel crack: The Gulf Coast ULSD differential rebounded slightly this week after dropping to front-month NYMEX ULSD futures minus 9.50 cents/gal last week and reaching its lowest point since March 2016.

The market has been weak due to high refinery run rates, high shipping costs, and companies selling to avoid taxes on end-of-year ULSD inventories.

Gulf Coast ULSD on Colonial Pipeline's prompt 1st cycle ("62 grade") was heard traded early Wednesday at the NYMEX February ULSD futures contract minus 9.00 cents/gal. It was assessed Tuesday at minus 8.25 cents/gal.

No trades in Gulf Coast VGO were heard Tuesday or early Wednesday. High-sulfur VGO was unchanged Tuesday from Friday at cash January WTI plus $12.40/b.

--Jeffrey Bair, jeffrey.bair@spglobal.com
--Daron Jones, daron.jones@spglobal.com
--Edited by Derek Sands, derek.sands@spglobal.com