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What Do Valero’s First-Quarter Crack Indicators Reveal?

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Valero’s refining margin

In this article, we’ll analyze Valero Energy’s (VLO) refining margin indicators in 1Q18. Let’s start by examining Valero’s refining margin in 4Q17.

Valero Energy observed a rise in its gross refining margin by $0.93 per barrel over 4Q16 to $8.8 per barrel in 4Q17. Its operating costs fell $0.11 per barrel compared to 4Q16. VLO’s net refining margin expanded $1.14 per barrel over 4Q16 to $3.6 per barrel in 4Q17 due to an expansion in VLO’s gross refining margin coupled with a fall in its operating cost per barrel YoY (year-over-year) in 4Q17.

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Valero’s peer Marathon Petroleum (MPC) also noted an expansion in its refining margin. MPC’s gross refining and marketing margin expanded $1.8 per barrel over 4Q16 to $13.1 per barrel in 4Q17. The expansion was majorly due to a wider blended LLS (Louisiana Light Sweet) 6-3-2-1 crack. Plus, refinery utilization stood at 101% in 4Q17 compared to 93% in 4Q16.

Phillips 66’s (PSX) worldwide refining margin expanded $2.5 per barrel (or 39% YoY) to $9.0 per barrel in 4Q17. However, Andeavor (ANDV) saw a YoY contraction of $1.8 per barrel in its gross refining margin to $7.6 per barrel in 4Q17.

Valero’s first-quarter crack indicators

Valero publishes crack indicators for the areas in which its refineries operate. Valero broadly operates in four zones: the US West Coast (or USWC), the US Midcontinent, the US Gulf Coast (or USGC), and the North Atlantic.

Three of VLO’s four regions have seen rises in their average regional cracks in 1Q18 compared to 1Q17. VLO’s Midcontinent crack indicator rose 16% over 1Q17 to $14.4 per barrel in 1Q18. Similarly, the USGC’s and North Atlantic’s indicators rose 1% and 9%, respectively, over 1Q17 to $16.3 per barrel and $11.9 per barrel, respectively, in 1Q18. However, the USWC crack fell 3% over 1Q17 to $15.5 per barrel in 1Q18. The rise in three of the four zones points toward the likely expansion of VLO’s refining margins in 1Q18 over 1Q17.

Quarter-over-quarter, VLO has seen falls in three of these four areas in 1Q18. The Midcontinent region has witnessed the largest contraction in its margin indicator in 1Q18 over 4Q17, followed by the North Atlantic and USGC regions. However, the USWC saw an expansion in its regional crack in 1Q18 over 4Q17.

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