Valero lifting refining rates: Update

Adds detail from call.

Refinery crude processing will not take off before the air travel industry, US independent refiner Valero said today.

Domestic fuel demand climbed from the second to third quarter, and Valero reported rebounding fuel exports. But refineries still wary of overwhelming diesel stockpiles could not significantly lift crude processing rates without steady improved demand for jet fuel, chief commercial officer Gary Simmons said.

"The advantage of jet fuel demand improving is that we can start to pull those molecules out and raise utilization along with it," Gary Simmons said.

Valero can blend almost all of what it would have produced as jet fuel last year into its ultra-low sulphur diesel (ULSD) pool at current levels, the company said. US refiners have used this strategy to avoid building up stockpiles of jet fuel as travel restrictions to contain the Covid-19 pandemic slashed US passenger volumes to less than 30pc of year-ago levels in the third quarter and just 11pc of prior-year volume in the second quarter.

Gasoline and diesel demand have improved since the spring, Valero said. But crude processing rates would not keep a faster pace than jet fuel demand.

Jet fuel prices are narrowing their discounts to ULSD, an important sign of improvement, Simmons said. Argus-assessed US Gulf coast jet fuel narrowed its discount to ULSD to within 1.5¢/USG of the cost of credits used to track compliance with US renewable fuel mandates that add to the cost of diesel.

"That's the thing you would like to see in the market," Simmons said. That parity "allows us to pull those molecules out of the diesel pool, and you will start to see that result in higher refinery utilization."

Valero will lift refining rates closer to year-ago levels in the final months of 2020. West coast throughputs would come the closest to 2019 levels, within 12pc at the high end of the guidance, while North Atlantic and US Gulf coast plans both fell 17pc below year-ago rates.

Valero's midcontinent refineries — typically the company's strongest-performing region — and US Gulf coast facilities reported third quarter margins of less than half of year-ago levels.

Hurricane damage to electrical infrastructure in the third quarter limited operations at Valero's 335,000 b/d refinery in Port Arthur, Texas. Valero also could not acquire the same volume of discounted crude it could find in previous quarters, Simmons said.

"We pride ourselves, especially in the US Gulf coast system, on our ability to optimize and go out and find a lot of these disadvantaged, discounted feedstocks," Simmons said. "Those opportunities really just were not there in the third quarter."

Sweet crude throughputs rebounded across the Valero system, climbing to 56pc of its total throughput after falling to 50pc in the previous quarter. The discount for US Gulf coast sour benchmark Mars to Light Louisiana Sweet (LLS) narrowed to 46¢/USG during the quarter — erasing advantages for running sour crudes with the thinnest discounts for sour in at least nine years. Heavy crude processing sank to 14pc after a surge in sour crude processing in the second quarter.

Hurricane disruptions to US Gulf coast medium sour crude output added to Opec+ production cuts in the third quarter, Simmons said. Sour crude discounts should recover alongside broader oil demand and rising Opec supply of sour barrels to the market, he said.

"You will have more of a gradual recovery in the quality differentials that go along with that," Simmons said.

Valero reported a $464mn loss for the quarter, down from a $609mn profit in the same quarter of last year.

By Elliott Blackburn