Valero optimistic on 2022 refining margins as product demand continues to recover (2024)

Highlights

Product demand surpassed pre-pandemic levels

Valero's Q1 run rates down across all regions on turnaround activity

Crude market tightness a wildcard

Valero Energy is optimistic that 2022 refining margins will remain strong, with gasoline and diesel demand continuing to rebound, CEO Joe Gorder said.

"In our system, we ended the year with gasoline demand at pre-pandemic levels and demand for diesel actually higher than pre-pandemic levels," said Gorder on the Jan. 27 fourth quarter results call.

"Looking ahead, we remain optimistic on refining margins. with low global light product inventories, strong product demand, global supply tightness due to significant refining capacity rationale and wider sour crude oil differentials," he added.

Valero reported stronger margins across in Q4, with quarterly US Gulf Coast refining margins reaching $10.86/b, the highest since 2015. About half of Valero's total 2.615 million b/d crude processing capacity is located along the USGC.

However, the spread of the coronavirus' omicron variant combined with weather-related drops are weighing down early-2022 demand.

"We saw good recovery last year, both gasoline and diesel and even good recovery in jet fuel demand. And we expect that rebound to continue through 2022. We started the year, gasoline demand is off a little bit from what we would expect," said Gary Simmons, head of Valero's commercial operations.

Simmons said so far in 2022, product demand in Valero's system is off by about 7% compared with 2019 levels. This is due in part to seasonality -- fact that first quarter results are traditionally the weakest, bouts of bad weather impacting gasoline demand, and a spike in coronavirus cases, he said.

"But I would tell you already, our seven-day average is only off about 3% of where it was in 2019. So it looks like this latest surge in COVID cases were already coming out of it," he added.

Bullish on gasoline

Low gasoline inventories are keeping Valero bullish on the fuel moving forward, as gasoline demand is expected to return in 2022 to 2019 levels.

"[W]hich was close to peak gasoline demand," Simmons said. "And we will be trying to feed that demand with significantly less refining capacity...we expect the gasoline market to be very tight."

"Some of those factors, in particular, the weather that are negatively impacting gasoline or actually are having a positive impact on diesel demand," he added. "So we see very strong diesel demand."

Simmons said Valero doesn't see a "clear path" to restocking the depleted inventories given the industry's heavy turnaround activity planned for the year as well as the refinery rationalizations that have occurred since the beginning of the pandemic.

"So for us, both gasoline and diesel look very constructive moving throughout the year. Jet demand will be the unknown. Our expectation is that as we get through this wave of COVID, much like we saw last year, domestic air travel will pick back up fairly rapidly but it be a longer period of time before international travel picks back up," he added.

In Q4, Valero saw jet demand recovering to 80% of pre-pandemic levels compared with the 60% of pre-pandemic levels seen in early 2021.

Crude oil wildcard

But the wildcard in determining 2022 refining margins rests with the crude market, according to Simmons.

"Obviously, a lot of tightness in the crude markets today, certainly having an impact on differentials and so for us, it's kind of when do we see OPEC begin to ramp up production?" he said.

Valero expects OPEC to increase production as global oil demand picks up, and a "lot of that will be medium and heavy sour barrels, which would be constructive to wider differentials moving throughout the year as well," he added.

OPEC+ has said it will increase production by 400,000 b/d in February. However, these planned OPEC production increases are likely to push the "sustainable spare capacity" to a low of 800,000 b/d by June, just as demand is set to grow by 3.5 million b/d during the second half of 2022, according Paul Sheldon, geopolitical analyst with S&P Global Platts Analytics.

Factoring in tensions with Russia regarding the Ukraine, global crude futures prices closed at seven-year highs on Jan. 26, to reach the highest level since October 2014.

Crude demand is expected soften as refiners begin a heavy turnaround season – as many had delayed work due to coronavirus-related issues. According to Platts Analytics, US refinery downtime is expected to be 2.4 million b/d in January, 2.7 million b/d February and 3 million b/d in March.

Valero has indicated it has a heavy turnaround schedule planned for the first quarter, by guiding refinery runs lower in all regions.

"We don't really comment directly on our turnaround activity going into the quarter. The volumes are a proxy for that," said Lane Riggs, Valero's head of refining, on the call.

In the USGC, according to regulatory filings with several agencies as well as market sources, Valero began planned work at its 335,000 b/d Port Arthur, Texas, plant in early January. Work is also underway on the gasoline-making complex at its McKee, Texas, refinery and at the West Plant of its Corpus Christi, Texas, plant.