Valero Energy increases Q3 runs, supported by strong diesel export demand

Highlights

July diesel exports higher on year

Gasoline demand recovering

Export arbitrage to Europe open

New York
Valero Energy expects to boost its US Gulf Coast refinery runs to between 1.4 and 1.45 million b/d, up from 1.385 million b/d in the second quarter, due in part for an increase in distillate demand, the company said July 30.

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Valero’s July distillate export volumes were up 107% from July 2019, said company CEO Joe Gorder on an earnings call, while not providing a volume figure, as Latin American economies appear to be restarting at a similar rate to that of the US.

“We see a pretty steady flow of diesel volume to Latin America, and the volumes are fairly constant. Where we really get a spike in our export volumes is when the [arbitrage] to Europe is open. And that arb is currently open as it has been much of July, and that’s where a lot of that incremental volume is going,” he added.

Export prices for ULSD so far in the third quarter are averaging $1.15/gal, according to S&P Global Platts price assessments, up from the 88 cents/gal in the second quarter.

ULSD exports from Valero’s Port Arthur, Texas, refinery in July are 1.28 million barrels, according to data from commodity tracker Kpler, with about 500,000 barrels heading to Amsterdam.

July ULSD exports from Valero’s Corpus Christi, Texas refinery are pegged by Kpler at 1.02 million barrels, primarily headed to Mexico and other Latin American destinations.

“If you look at our export volumes last year in July, we exported about one-third of … the diesel [our refineries] produced,” Gorder said, adding that this July the company estimates it is exporting 47% of its production.

“So almost half of what our refineries are making are going to the export markets,” he said.

Valero’s total refinery throughput averaged 2.3 million b/d for the second quarter, resulting in system refinery utilization of 74%. Second quarter 2020 throughput was 647,000 b/d lower than the second quarter of 2019. But that was slightly above the median guidance of 2.2 million b/d given on the company’s April 30 first quarter results call as demand recovered more quickly than anticipated.

“While the impact of the pandemic and the ensuing global economic downturn so far this year has been significant, we saw a rapid recovery in demand for refined products as we moved through the quarter,” said Gorder.

Gasoline demand rising

Gasoline demand is rising faster than expected – both at home and abroad – said Gorder, without providing actual volumes.

Gasoline exports fell off early in the second quarter to about one-third of what they would normally be but gained momentum as the quarter progressed.

“But by June we were back to 70% of our normal export volume. July, with the estimates we have today, we’d be at about 76% of normal on our export volumes,” he said.

“So gasoline [export] demand has recovered much faster than most would have expected and appears to be pretty strong,” he added.

Domestic gasoline demand also ticked up, after bottoming out to roughly 50% of pre-coronavirus levels in April when states imposed strict lockdown procedures.

As restrictions eased, Valero reached 77% of normal gasoline demand in its system in May. And by June, demand had risen to 88% of normal and “we’ve continued to see recovery as we transition into July,” Gorder said.

The magnitude of US diesel demand destruction was not as great as that of gasoline in the beginning of the second quarter.

“We fell off to about 70% of normal demand. But diesel demand recovered fairly quickly to about 80% of normal,” Gorder said.

Low drilling hurts diesel demand

However, Valero’s diesel demand still lags that of the 94% of normal demand figure released by the US Department of Energy.

“I think the difference there is certainly in our Three Rivers and the key system. We had a lot of diesel going into the upstream sector. And with the lower drilling activity we’re seeing a little less diesel demand than maybe we are seeing nationwide,” said Gorder.

Valero’s 89,000 b/d Three Rivers refinery is located in the Eagle Ford shale play, and the drop off in drilling activity due to the fall-off in the price of crude has cut rig counts.

However, jet demand is a bit troubling, Gorder said.

“Certainly with some of the renewed efforts to slow the spread of the pandemic and many of the states shutting down, we don’t have a lot of good line of sight into jet demand, but some of our nominations for August demand are down a little bit from what we saw in July,” he said.

Valero reports net loss of $504 million

Valero Energy was the first US refiner to release second quarter earnings, giving a glimpse into exactly how the coronavirus pandemic impacted its operations and finances.

Valero reported a second quarter adjusted net loss of $504 million, or $1.25/share, compared to the second quarter adjusted net income of $665 million, or $1.60/share, in 2019.

“With the worst quarter in memory for the refining industry now in the books, we can see that the end result for gross margins was actually no worse than the 2Q09 trough, which is impressive considering the magnitude of the COVID-19-induced demand decline,” wrote JP Morgan analyst Phil Gresh in a research note.