Valero expects to run its refineries at about 70% in Q2

Valero Energy expects to run its refinery system at about 70% of capacity in the second quarter of 2020 as it seeks to strike a balance between supply and demand while states begin to reopen cautiously after the coronavirus pandemic shutdowns.

"We've adjusted our throughput rates at our refineries to more closely match product supply with demand to ensure that our supply chain does not become physically unfeasible," said Joe Gorder, Valero's CEO speaking on the company's first quarter results call.

Refiners across the board cut output and trimmed rates as gasoline demand began to plummet in mid-March – a result of stay at home orders put in place by several states where the coronavirus was spreading widely.

"Most refiners try to push their refinery utilization down to somewhere near minimum," said Lane Riggs, Valero's head of refining on the call, adding that is somewhere near 60% to 65% for any given unit.

"The risk of shutting one down very much puts you at risk when you try to start back up," he said, adding that a unit restart often forces a full-turnaround.

To adjust for falling gasoline demand and not risk equipment, Valero shut down the 100,000 b/d gasoline-making unit at its 215,000 b/d St. Charles, Louisiana, refinery, following a turnaround.

GASOLINE DEMAND PICKING UP

Valero has seen gasoline demand picking up already, ahead of the imminent lifting of stay at home orders from two big gasoline demand states – Texas and Florida.

"If you look at the 7-day average in our rack systems, it [gasoline demand] is about 64% of normal. So already, a 9% increase...from early April," said Valero's Chief Commercial Officer Gary Simmons.

Simmons said increasing gasoline demand is noticeable in the Mid-Continent and the US Gulf Coast as stay at home orders start to be lifted.

"We're seeing a fairly significant sharp increase in [gasoline] demand," he added.

Weekly inventory data from the Energy Information Administration supports this, showing that gasoline demand for the week ended April 24 rose over 500,000 b/d to 5.86 million b/d over the week earlier.

And Platts Analytics forecasts that gasoline demand has risen about 15% so far over the last week, while miles traveled was up no more than 10%.

That means "that there was some pre-stocking in advance of May 1 when states come out of closure," said Gary Greenstein, a consultant with Platts Analytics.

Diesel in the doldrums as jet is blended in

The industry did a "good job of balancing supply and demand on the gasoline side," Simmons said, adding that Valero cut refinery runs with the expectation that cuts would balance diesel supply with demand.

"However, the jet demand destruction was just so severe, and everyone started blending jet into diesel, it caused the diesel yield from refineries to be really at record levels," he added.

So far this quarter, USGC jet is holding a $30.88/b discount to the front-month NYMEX ULSD contract, compared with the first quarter's $15.53/b discount, Platts price assessments show.

Jet demand is expected to remain weak for longer than gasoline on expectations that when workers return to their job they will drive whenever possible to ensure safe social distancing.

But airlines are not expected to see that kind of bump. Last week, executives from Delta Air Lines, the second largest US airline, said they believed it could be up to three years before there is a sustainable recovery in their industry.

REGIONAL NARRATIVES

While Valero plans total system runs of 70% that does not mean every refinery will cut runs to 70%.

Valero expects US Midwest refinery runs to average between 315,000 b/d and 335,000 b/d in the second quarter out of total 485,000 b/d of refining capacity, or between 65% and 69% of capacity.

In the Midwest, Valero's Riggs said demand destruction has "bottomed out" but that Valero is proceeding cautiously there "because if you get out of balance...you might end up shutting a refinery down."

"That's really the narrative...across every system we have," he added.

However, Valero expects second quarter USWC run rates to range between 215,000 b/d and 235,000 b/d out of 305,000 b/d of refinery throughput capacity, or possibly as high as 77% of capacity.

Second quarter planned work at Valero's two non-US refineries – the 235,000 b/d Quebec City refinery and the 270,000 b/d Pembroke, UK, plant – will cut rates there to between 315,000 b/d and 335,000 b/d, or between 62% and 66% of capacity

On the USGC, Valero's run rates are expected to average between 1.325 million b/d and 1.375 million b/d in the second quarter, or between 71% and 74% of capacity, depending in part on how the export markets hold up.

Valero said distillate export volumes were holding around 60% of normal, due in part to stronger demand within the US keeping barrels at home.

Valero did not provide actual export volumes but said its April gasoline volumes were down about 10% so far in April from the first quarter, and that May demand was also lower as lockdowns in South America cut into gasoline demand.

However, Mexican demand for wholesale barrels sold within the country has held up, which is support the export market.

"Yesterday, into Mexico, we moved 85% of what we were moving in the first quarter," said Simmons.