Valero's Q3 refining margins rebound on strong demand, low inventories

Valero Energy's refining margins jumped in the third quarter as the economic recovery from the coronavirus bolstered demand, and will likely remain strong going forward in part because of low inventories, the company said Oct. 21.

"We saw significant improvement in refining margins globally in the third quarter as economic activity and mobility continued to recover in key markets," said Valero's CEO Joe Gorder on the Q3 2021 results call.

Valero's systemwide refining margin averaged $9.85/b in Q3 2021, compared with the $4.10/b average in Q3 2020.

"Refining margins were supported by strong recovery in product demand coupled with product inventories falling to low levels during the quarter," Gorder said.

With total US light product inventories at 5-year lows and product demand recovering to over 95% of 2019 levels, Valero reported Q3 refinery utilization of 91%, running at higher-than-forecast run rates. Valero's current gasoline sales are holding at 95% of 2019 levels, while diesel sales have risen to 10% over 2019 levels.

However, Valero plans to cut runs in the fourth quarter at its West Coast refineries and two North Atlantic refineries due to unspecified planned work.

"Looking ahead, we continue to have a favorable outlook on refining margins as a result of low global inventories, continued demand recovery, and global balances supported by the significant refinery capacity rationalization seen over the last 1.5 years," Gorder said.

While Valero does not expect total demand to return to pre-pandemic levels until 2022, margins remain supported by low inventories.

"Inventories domestically are low, but globally they're low as well. And when you look at fourth quarter turnaround activity, it's difficult for us to see we're going to replenish clean product inventories before next year," said Gary Simmons, Valero's head of commercial operations.

High natural gas prices supportive

Valero expects to benefit from the global natural gas price spike which encourages fuel switching by refiners and other industrial users, adding to the value of diesel crack. Valero is also seeing increased access to refined product export markets as other refiners across the globe are forced to reduce runs because of high natural gas prices, and satisfy domestic markets.

"The expected high natural gas prices in Europe and Asia through the winter should support liquid fuels demand as power generation facilities, industrial consumers and petrochemical producers see incentives to switch from natural gas to refinery oil products for feedstock and energy needs," said Gorder.

S&P Global Platts Analytics sees high natural gas prices resulting in gas-to-oil switching adding over 500,000 b/d of oil demand this winter.

Analytics expects European TTF natural gas prices as well as the Asian JKF contract to remain high, in the $25-30 MMBtu range throughout the winter and well into 2022.

Natural gas accounts for about 25% of Valero's per barrel operating expenses, and a $1/MMBtu rise in the natural gas price adds about 20 cents/b. In Q3 2021, Valero reported refining cash operating expenses of $4.57/b, which was 27% higher than Q3 2020 primarily due to higher natural gas prices.

Lane Riggs, Valero's head of refining, noted that most of Valero's refineries are "long" natural gas because of their complexity, which allows them to burn propane to supply natural gas.

"We can always get into a place where we're just essentially deriving our natural requirements from oil," he said.

Fuel switching by European and UK refiners has cut their margins, giving a "substantially larger market to people on this side of the Atlantic," Riggs added.

"You are not seeing much flow from Europe into those Latin American markets and we are seeing a big pull into those markets," said Gary Simmons, Valero's head of commercial operations.

Simmons did not supply Valero's export volumes but Energy Information Administration data put refined product exports at 4.84 million b/d so far in Q4, compared with the 5.2 million b/d in Q3.

Renewables portfolio growth

Valero, a first mover among refiners in renewable diesel and ethanol, started up the Diamond Green Diesel 2 expansion project at its St. Charles, Louisiana, refinery.

A joint venture with Darling Ingredients, the expansion increased production capacity to 690 million gal/yr of RD, with Valero confirming expectations for 1 million gal/d of RD production in 2021.

Production from Valero's 12 ethanol plants averaged 3.6 million gal/d in Q3, rising to 4.2 million gal/d in Q4. Plans to move eight of the plants into the Navigator carbon capture sequestration system is underway, with the remaining plants moving at a future date.