Valero sees rising gasoline, diesel demand as it seeks to replace Russian feedstocks

Valero Energy reported better-than-expected first-quarter earnings of $905 million as demand for refined products grows post-pandemic and refinery rationalizations cut supply, boosting cracks for both gasoline and diesel -- a trend which is expected to continue.

"The fundamentals that drove strong results in the first quarter, particularly in March, provide a strong backdrop for refining margins," said CEO Joe Gorder on the April 26 Q1 results call.

However, one recent operational change Valero is wrestling with is the loss of Russian feedstocks, as the US ban on Russian imports went into effect on April 24, following Russia's February military incursion into the Ukraine.

As a large importer of Russian refined products, Valero is being forced to seek new sources to replace the fuel oil and VGO imported from Russia, used as feedstock at its US Gulf Coast and, to a lesser extent, its California refineries.

"We are out buying replacement barrels...which [are] largely [from] the Middle East or South America," said Lane Riggs, Valero's chief operating officer on the call.

Rigs said Valero has been able to "shore up" supplies with those barrels, but variability in feedstocks from different regions means changing blending techniques to accommodate different qualities.

"That's part of the sausage making. We have to figure out how to blend to something that we think is most economic for us to run," he added.

Incremental barrels and compressed cracks

During the first quarter of 2022, Valero imported 3.9 million barrels, or about 43,000 b/d of Russian fuel oils and VGO into their sophisticated US Gulf Coast refineries, according to US Customs data, with the last cargo seen arriving on March 23.

So far in April, Valero's imports of Russian feedstocks have dropped to about 12,000 b/d. The last cargo arrived on April 15, according to most recent US Customs data.

Valero uses Russian fuel oils and VGO as feedstocks in cokers, gasoline-making fluid catalytic cracking units, and hydrocrackers, and the lack of VGO in particular could be challenging as gasoline demand starts to pick up.

So far in 2022, diesel cracks have surpassed those of gasoline on strong demand, with Q1 gasoline demand seen "a little bit soft" following "a wave of Covid," said Valero chief commercial officer Gary Simmons.

"By the end of the quarter, we were seeing gasoline demand at or slightly above pre-pandemic levels," he said, adding "the strength in crack spreads have been led by diesel."

US inventories for light products are 41 million barrels below the 5-year average, Simmons said, with distillate inventories at 27 million barrels below.

Low inventories translate into a strong margin environment. April's margins outpaced those of March as growing gasoline demand raised cracks and causing "compression" between gasoline and diesel cracks," he said.

So far Q2 USGC ULSD cracks to Dated Brent are averaging $57.27/b, compared with the $23.09/b for CBOB, according to Platts price assessments. However, cracks for both have just about doubled from Q1 when CBOB cracks averaged $12.67/b. ULSD cracks averaged $24.88/b.

"VGO is tight. We are going to have competition between an incremental barrel going to the FCC to make gasoline versus that barrel going to a hydrocracker to make diesel. We expect gasoline cracks to get stronger as we move through the second quarter," Simmons said.