Valero expects more normal oil markets by the third quarter

Valero Energy expects refined product demand to gradually pick up in the second quarter of 2021 and be close to normal by the third quarter as coronavirus vaccinations increase along with personal mobility, which will shift disposable income spending toward funding pent-up travel demand.

"We've been pleased with the pace of the recovery so far," said Valero's CEO Joe Gorder on the Jan. 28 results call.

"If we can get government functioning appropriately on the [coronavirus vaccine] distribution, I think we are going to be in much better shape, perhaps quicker than we realize," he added.

The newly-installed Biden Administration set a target of administering at least 100 million shots of vaccines within its first 100 days. As of Jan. 27, over 20 million Americans have been partially vaccinated and 3.8 million Americans have received the second shot of the two-shot vaccine protocol, according to the Centers for Disease Control and Prevention. However, with the approval of a new one-shot vaccine "the speed to getting to herd immunity should pick up," according to S&P Global Platts Analytics.

Stronger gasoline margins ahead

Valero executives said they were encouraged by the fact that refined product inventories were being whittled down back into five-year ranges from the second quarter of 2020 peak when governments began to mandate stay-at-home orders to limit personal mobility, cutting into demand for gasoline, diesel and jet fuel.

Gary Simmons, Valero's head of commercial operations said on the call that the Energy Information Administration data shows gasoline demand today is slightly over 90% year-over-year from last year, which is confirmed by Valero's wholesale volumes.

He notes this is despite an increase in newly reported cases of coronavirus which reached about 250,000/day in early January, and have since fallen to about 155,000/day, according to John Hopkins Coronavirus Research Center data.

"The combination of reasonable gasoline demand and relatively low gasoline inventories has caused the front market to be a little stronger. I think one of the key things there is the stronger prompt market has really flattened the curve on gasoline," he said.

"So it's taking away the incentive to store summer grade gasoline, and that certainly sets up for a stronger driving season in terms of gasoline margins," he added.

So far in the first quarter, US Gulf Coast cracking margins for WTI MEH already are averaging $8.25/b, compared with the fourth quarter's $5.90/b average, Platts Analytics margin data shows.

Valero's refining system ran at 81% of capacity in the fourth quarter or 2.55 million b/d of throughput. For the first quarter, Valero expects to run between 2.315 million b/d and 2.425 million b/d due to lower rates in the Midwest and California.

Diesel demand set up for longer term

Over the last seven days, Valero has seen diesel demand growth in its system, up to 111% year-over-year compared with EIA demand of 98% year-over year, Simmons said, helped as colder weather pulls on heating oil and a slight increase in drilling activity.

"With people spending disposable income ordering things, freight, on-road freight, trucking and rail has been strong as well," said Simmons.

Incremental agricultural demand is expected in the spring, "as you start to plant crops," Simmons said.

"And then, moving throughout the year, we also see that as jet demand begins to recover, it will lower diesel yields and help bring supply and demand into balance, which will set diesel up nicely for the longer term," he added.

By the second quarter, Valero expects to see demand pick up and become more normal in the third quarter.

"With the exception that we do see there could be a lot pent-up demand and people who are spending disposable income largely buying things that they're ordering, are going to spend that disposable income getting out and on experiences, family vacations, which could cause a surge in gasoline demand," he added.