Valero expects wider sour crude discounts in 2021

Falling global crude processing capacity is speeding the recovery of refinery margins ahead of a return to wider crude quality discounts in the second half of the year, US independent refiner Valero said today.

An estimated 3mn b/d of refining closures worldwide has supported rising refining margins, even as fuel demand lingers generally below year-ago levels, the company said during a quarterly earnings call. That included roughly 900,000 b/d of announced closures in the US as a collapse in global fuel demand last year forced decisions at some of the least competitive refining assets.

Additional US shutdowns on the US west and Atlantic coast were possible, but most of the remaining decisions would more likely affect southern Europe, where refiners face higher costs and lack a crude supply advantage.

"We have been, I do not want to say pleasantly surprised, but certainly surprised at the acceleration of some of these closures," including a higher-than-expected volume in the US, Valero chief operating officer Lane Riggs said. "But we have kind of done, I would say, our share."

Higher Opec supply in the second half of the year and the potential for an easing in US sanctions on Venezuela and Iran should restore wider discounts to light, sweet crude on the heavy and sour grades that US refiners have broadly configured to process. Those discounts narrowed dramatically in 2020. US Gulf coast sour benchmark Mars averaged a 25¢/bl premium to WTI crude at Houston, Texas, during the third quarter, based on Argus assessments. Mars averaged a $2.29/bl discount over the previous five years for the same quarter.

"We pride ourselves on our ability to optimize the refining system, especially on the feedstock side of the business," chief commercial officer Gary Simmons said. "With the very narrow crude quality differentials, it has been challenging to do that."

President Joe Biden's new administration has no immediate plans to change policy toward Venezuela or Iran. But an expected return to a deal trading limits on Iranian nuclear production with expanded global access for Iranian crude would add sour supplies. The new administration has given few hints on its approach in Venezuela, where sanctions under former president Donald Trump removed the third-largest supplier to the US of heavy, sour crude in 2019. But an increased interest in working with European allies could change the US hardline approach against the country.

"All of those will allow us to do more optimization on the feedstock side, and as we do that, our capture rates will go up," Simmons said.

Planned US refining rates for the quarter were 5-10pc lower than year-ago processing volumes, and lower in the US Gulf coast. Valero preferred to limit its pricing exposure with lower throughputs as higher demand materialized, Riggs said.

"We are certainly positioned in the US Gulf coast, if things recover quicker, then our rates could be higher," Riggs said.

By Elliott Blackburn