REFINERY MARGIN TRACKER: US margins dip then trend up as demand recovery strengthens

US refining margins mostly trended slightly lower for the week ended April 23, but recovered from a midweek slump on a rosier picture for transportation fuels going forward, ending the week on an upward trajectory, an analysis from S&P Global Platts showed on April 26.

Positive comments on post-coronavirus demand recovery from Valero Energy on their first quarter results call, bolstered by news that airlines like United were hiring back pilots amid the possibility of international travel returning this summer, pushed US refining margins higher by end week.

"As we head into summer, we believe that there's a pent-up demand among much of the population to travel and take vacations, which should drive incremental demand for transportation fuels," Valero CEO Joe Gorder said on the April 22 results call.

"We've seen a strong demand in recovery in gasoline and diesel at 93% and 100% of pre-pandemic levels," he added, noting that Valero, which posted a loss for the first quarter, had positive income and cash flow in March.

On the USGC, where about 40% of Valero's 3.2 million refining capacity is located, cracking margins for WTI MEH averaged $12.54/b for the week ended April 23, down from the $13.06/b the previous week, according to S&P Global Platts Analytics data. However, the margins rose from $12.49/b on April 19 to $12.84/b on April 23.

USGC coking margins for Maya averaged $10.24/b for the week ended April 23, down from the $11.09/b the week earlier, but also ended the week higher at $10.41/b.

"We're also seeing positive signs in the crude market with wider discounts for sour crude oils and residual feedstocks relative to Brent as incremental crude oil from the Middle East comes to market," Gorder said.

Wider spreads ahead

Valero is seeing wider crude differentials between sweet and sour crudes earlier than originally anticipated, due in part to mid-February polar vortex on the USGC which took offline a lot of complex refining capacity "that pushed medium and sour crude back into the market and helped widen those differentials," said Gary Simmons, Valero's head of commercial operations said on the call.

Simmons also cited as reasons for the more rapid pace of the wider quality differentials the SPR release of 10 million barrels of sour crude, more Iranian and Venezuelan barrels on the market heading to Asia taking pressure off US medium sour crudes like Mars, and the recent refinery fire in Mexico, which pushed out Maya barrels into circulation.

Simmons also noted that with more OPEC barrels expected back on the market and the production cap lifted in Canada allowing more Western Canada Select to flow south, Valero expects to see sweet and sour differentials continue widen.

"We have seen a switch in economic signals," Simmons said on the call, with the caveat that the switch is dependent on refinery configuration and location.

"But at some of our refineries today, the economic signals are pointing us to run more heavy sour, and we are seeing fairly equal economics between medium sour grades and light sweet," he said.

The sweet-sour spread between US Gulf Coast crudes like Light Louisiana Sweet and Mars is averaging $1.77/b so far in the second quarter, according to Platts prices assessments, compared with the $1.58/b in the first quarter and the 94 cents/b in 2020.

"On the diesel side, we've been in the mode where diesel demand is almost fully recovered, especially in our Mid-Continent system as agricultural demand is starting to kick in," said Simmons.

"And the combination of the economic stimulus and infrastructure build we think drives economic growth and will cause sustained strong diesel demand going forward," he added.

Midwest margins were the only US region showing a weekly gain, as increased harvest demand put a pull on diesel, according to Platts Analytics margin data.

US Midwest coking margins for WCS ex-Cushing averaged $15.33/b for the week ended April 23, compared with the $14.81/b the week earlier.

Reasonably high rates

Valero expects to run at "reasonably high rates" in the second quarter, in part to make up for the 60 million barrels of light product inventory drawn down as a result of polar vortex in February.

Valero expects second quarter 2021 system throughput to average 2.725 million b/d, compared with the 2.41 million b/d in the first. USGC and Midwest regions are expected to rise to average 1.675 million b/d and 440,000 b/d in the second quarter, while runs at its North Atlantic segment – comprised of its UK and Canadian refinery will be lower due to turnaround activity, falling to an average of 260,000 b/d for the quarter.

US West Coast refinery utilization is forecast higher, at 350,000 b/d, the company said.

Lane Riggs, Valero's head of refining, said on the call that "there is a call on refining to run at reasonably high rates ... we're sort of inching up as an industry, but certainly where margins are today and where margins are going forward that you'll see increasing utilization in the industry."