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What Valero’s Refining Margin Indicators Suggest

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Valero’s refining margin

In the preceding part, we analyzed Marathon Petroleum’s (MPC) refining margin indicators for 4Q17. Andeavor (ANDV) also publishes a refining index, which shows a fall in its consolidated refining index in 4Q17 so far compared to 3Q17. Now, we’ll analyze the refining margin indicators published by Valero Energy (VLO). These indicators hint at VLO’s likely margin trend in 4Q17.

Refining cracks rise in November 2017

Valero Energy (VLO) announces area-wise crack indicators where its refineries operate. The four regions where Valero operates its refineries are the US Gulf Coast (or USGC), the US Mid-continent (or Midcon), the US West Coast (or USWC), and the North Atlantic.

Valero’s crack indicators have risen in all areas in November 2017 compared to October 2017. The USGC crack indicator rose from $17.6 per barrel in October to $17.9 per barrel in November. Also, Midcon, USWC, and North Atlantic rose by $0.8 per barrel, $2.3 per barrel, and $0.6 per barrel, respectively, in November over October. Thus, the rise in refining cracks in all the four areas points towards a better margin environment for VLO in November 2017 compared to October 2017.

Valero’s refining margin indicators in 4Q17

VLO has observed a mixed trend in average regional cracks in 4Q17 compared to 3Q17. While the Midcon crack indicator rose quarter-over-quarter in 4Q17, others saw a decline in crack indicators.

VLO’s Midcon crack indicator rose from $18.5 per barrel in 3Q17 to $19.0 per barrel in 4Q17. However, USWC and North Atlantic indicators fell by $3.3 per barrel quarter-over-quarter and $2.2 per barrel quarter-over-quarter, respectively, in 4Q17. Also, the USGC crack fell by $1.3 per barrel over 3Q17 to $17.7 per barrel in 4Q17. The fall in three of the four zones points towards a likely fall in VLO’s refining margins in 4Q17 over 3Q17.

However, year-over-year, cracks have risen in all the four areas. Midcon witnessed the largest rise in margin indicators in 4Q17 over 4Q16. Midcon’s margin rose by $8.1 per barrel over 4Q16 to $19.0 per barrel in 4Q17. Also, the USGC crack rose by $2.0 per barrel YoY to $17.7 per barrel in 4Q17. Also, USWC and North Atlantic cracks have widened by $3.8 per barrel and $0.6 per barrel over 4Q16, respectively, to $17.9 per barrel and $14.7 per barrel in 4Q17. Thus, a year-over-year rise in all the four areas implies a likely surge in Valero’s refining margin in 4Q17 over 4Q16.

For more information about the refining industry, read Market Realist’s primer, An Investor’s Guide to the Refining Industry: All You Need to Know.

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