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Why Did Valero’s Refining Margin Tumble in Q1 2019?

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Apr. 25 2019, Published 9:26 a.m. ET

Valero’s refining margin in the first quarter of 2019

Valero Energy’s (VLO) gross refining margin contracted from $8.7 per barrel in the first quarter of 2018 to $8.0 per barrel in the first quarter of 2019. Its operating costs also rose $0.5 per barrel YoY (year-over-year).

The contraction in Valero’s gross refining margin coupled with the rise in its operating costs hit the company’s net refining margin. Valero’s net refining margin contracted from $3.1 per barrel in the first quarter of 2018 to $1.9 per barrel in the first quarter of 2019.

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Why did Valero’s refining margins plunge?

Valero’s refining margins contracted due to the narrowing of the oil spreads and gasoline cracks.

Valero can utilize its midstream assets to process more discounted crude oils. However, the fall in spreads between discounted oils and Brent affected the company’s margin. The Brent-ANS (Alaskan North Sweet), Brent-Maya, and Brent-ASCI (Argus Sour Crude Index) spreads narrowed YoY in the first quarter. The Brent-ANS spread fell from $0.2 per barrel in the first quarter of 2018 to -$0.68 per barrel in the first quarter of 2019. The Brent-Maya spread also narrowed from $9.46 per barrel to $5.04 per barrel. Similarly, the Brent-ASCI spread narrowed from $4.88 per barrel in the first quarter of 2018 to $2.89 per barrel in the first quarter of 2019.

In the first quarter, gasoline cracks also declined across Valero’s operating zones, including the US Gulf Coast, the US West Coast, the US Midcontinent, and the North Atlantic. Diesel cracks put up a mixed trend.

Valero’s peers

Valero’s peer HollyFrontier’s (HFC) refining index values have narrowed YoY in its primary operating regions, the Midcontinent and the Rockies. Lower index values suggest weaker refining margins for HollyFrontier in the first quarter of 2019.

Further, the benchmark crack, the USGC WTI 3-2-1, narrowed 3% over the first quarter of 2018 to $15 per barrel in the first quarter of 2019. This change could affect the margins of refiners with capacities in the US Gulf Coast. The US Gulf Coast is a significant refining area for Phillips 66 (PSX). It accounts for ~36% of the company’s crude oil throughput.

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