Valero plans 70pc utilization in second quarter: Update

Updates throughout with detail from call. Adds table.

Valero will cut second-quarter refining throughputs to near 70pc of capacity to match an ongoing collapse in global fuels demand.

The US independent refiner with the country's third-largest domestic capacity expects total throughputs to fall by 15-20pc from the typical 2.6mn b/d volume the company processes in the second quarter.

Valero was optimistic that gasoline demand would recover this summer from a historic late-March plunge under travel and other restrictions aimed at containing the spread of Covid-19, executives said on a quarterly earnings call. A lower and slower outlook for jet fuel complicated work to avoid a margin-crushing oversupply of diesel. Demand, not crude prices, would lead refinery rates, chief operating officer Lane Riggs said.

"Our buying habits right now is to be on the assumption that crude will be available, and that we are going to run our assets to meet demand," Riggs said.

US gasoline demand plummeted to its lowest levels in decades at the end of March, reaching 5.1mn b/d in estimated national consumption. Valero reported idling gasoline units and cutting crude throughputs across most of its capacity earlier this month. The 3.2mn b/d refiner operates in the US, Canada and the United Kingdom.

Gasoline demand has crept higher in April, although it remains far below normal seasonal levels. Implied consumption increased last week by 10pc to 5.9mn b/d, lower from year-ago levels by 37pc, according to the Energy Information Administration. Demand for the fuel across Valero's wholesale racks had increased by 9pc over the same period to 64pc of year-ago levels, the company said. As restrictions ease across southern and midcontinent states, that gasoline consumption should continue to climb, chief executive Joe Gorder said.

"I think there probably is a pent up demand to get out of their houses, to get mobile and to shop again and to get to restaurants again," Gorder said. "I do think we are going to see more activity, not only here, but much more broadly, particularly through the south.

Midcon, west coast caution

The midcontinent had seen "the best recovery in demand, out of all the regions," chief commercial officer Gary Simmons said.

But Valero was cautious in the landlocked region and on the west coast, where there were fewer options to address product supply outstripping demand, Riggs said. Projected midcontinent rates would be the lowest relative to average second quarter throughputs, at 315,000-335,000 b/d. That was roughly 30pc lower than the region's five-year average for the quarter.

Crude rates in the midcontinent and west coast were below average in the first quarter.

"If you get it wrong, you get into having to do very uneconomic things to fix those problems," Riggs said.

Valero's wholesale business in Mexico had fallen to 85pc of first quarter levels, and overall gasoline exports had fallen by 10pc in April, Simmons said. Latin American demand is dropping more severely in May, he said.

"Our wholesale barrels are holding, but we are seeing the export markets fall off," Simmons said.

Diesel dilemma

Diesel, a bright spot in the initial gasoline demand shock, had become a problem. Valero's exports had fallen by 50pc. Refiners had successfully managed gasoline in most markets, but the collapse in jet fuel demand had made diesel more difficult to balance.

Diesel offered a haven for jet fuel as US airlines cut capacity by more than 80pc. Governments worldwide restricted travel in response to the pandemic. Jet fuel consumption last week was 60pc lower than the same week last year.

Refiners blended jet fuel blending into diesel still demanded by commercial shipping and agriculture. But diesel inventories climbed in April despite overall cuts in crude processing. Jet demand would remain low until a vaccine or other medical solution restored consumer confidence in air travel, the company said.

"The jet demand destruction was just so severe," Simmons said. "I think we are seeing, at least this week, starting to see some indications in the market that people in the industry, including ourselves, are making some adjustments to their operations to bring the diesel yields down."

Changes to crude units to shift some feedstocks from diesel into gasoils, giving more space for jet fuel blending into diesel, could help manage product stockpiles and further reduce crude demand.

Valero in the first quarter eased away from record volumes of light, sweet crude that its refineries processed at the end of 2019. Heavy crudes and sour crudes both increased their shares in the company's overall slate during the first quarter, to 25pc of total throughputs. Sweet crude processing fell to 62pc, or 1.5mn b/d, while resid throughputs increased to 9.5pc.

Prices encouraged running more medium sours in March, but the refiner has since returned to a slate made up of more light, sweet and heavy, sour crudes, the company said today.

By Elliott Blackburn