Valero Energy’s oil spreads
Previously in this series, we analyzed Valero Energy’s (VLO) refining crack indicators in the first quarter. Now, we’ll discuss the trends in Valero Energy’s oil spreads.
Different oil spreads impact Valero Energy’s refining margin in different regions. The Brent-WTI spread impacts Valero Energy’s margin in the Midcon (US Mid-Continent) region. The Brent-ANS (Alaskan North Slope) crude oil impacts the company’s margin in the USWC (US West Coast) region. Other notable spreads are the Brent-ASCI (Argus Sour Crude Index), the Brent-Maya, and the Brent-LLS (Louisiana Light Sweet) crude oil spreads, which impact Valero Energy’s margin in the USGC (US Gulf Coast) region.
Oil spreads also impact peers’ refining margins. Delek US Holdings’ (DK) refining margin is impacted by the Midland WTI-Cushing WTI spread. The WTI-WCS (Western Canadian Select) crude oil and the WTI-Maya spreads impact Phillips 66’s (PSX) margins.
Oil spread trends
Oil spreads play an essential role in determining Valero Energy’s refining margin. The larger the spread, the better it is for Valero Energy’s margin. In the first quarter, three of the five spreads have narrowed YoY (year-over-year).
The Brent-Maya spread saw the largest contraction YoY in the first quarter. The Brent-Maya spread has narrowed by $4.5 per barrel YoY to $5.0 per barrel in the first quarter. The Brent-ANS and the Brent-ASCI spreads have also narrowed YoY in the first quarter.
Valero Energy uses different crude oils and feedstocks in its refineries. Crude oils like WTI, LLS, and ASCI can be procured at a discount to Brent. Refiners sell refined products that have prices based on Brent. Refining discounted crude results in lower input costs and leads to higher margins and earnings. In the first quarter, most of the discounts or spreads have fallen, which could have a negative impact on Valero Energy’s refining earnings.
However, the Brent-LLS and Brent-WTI spreads have expanded YoY in the first quarter. The rise in these spreads could offset the negative impact of other narrowing oil spreads.