Are Valero’s Refining Crack Spreads Firming in Q4?



Valero Energy’s (VLO) overall profits are affected by its refining margins and earnings, which are driven by refining cracks and oil spreads. While refining cracks, in simple terms, are the difference between refined product prices and crude oil costs, oil spreads are the difference between the two types of crude oil’s prices. To learn more, read Refining Crack Spread Overview: All You Ever Wanted to Know.

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Therefore, industry crack and spread trends could show the direction of a refiner’s margins and earnings in a quarter. Valero periodically publishes crack indicator and oil spread data for the areas where it has significant refining operations. These areas include the US midcontinent (or Midcon), the US Gulf Coast (or USGC), the US West Coast (or USWC), and the North Atlantic.

Valero’s crack indicators in Q4

Valero’s crack indicators have been widening in the fourth quarter. Its USWC crack has expanded the most, followed by the North Atlantic’s, USGC’s, and Midcon’s.

On the West Coast, Valero’s crack has expanded by 117% YoY (year-over-year) to $26.80 per barrel in the fourth quarter. Similarly, its North Atlantic and USGC cracks have expanded 52% and 42% YoY, respectively, to $13.70 and $17.30 per barrel. These two regions accounted for 75% of Valero’s throughput in the third quarter. Lastly, Valero’s crack indicator for the Midcon region, which accounted for 15% of the company’s throughput in Q3, has expanded by 7% YoY to $17.70 per barrel in the fourth quarter. This robust crack expansion across the board could support Valero’s refining earnings.

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Oil spread trends in Q4

Oil spreads are vital for Valero, as the company has the refining capacity to process heavy and sour crude. These crudes are available at a discount to the benchmark crude oil, Brent. So, if a refiner can process crude oil priced lower than Brent, its input costs are lower, supporting its earnings.

Meanwhile, output or refined product prices usually move in line with Brent prices. Therefore, lower input costs coupled with better or flat output product prices expand a company’s refining earnings.

This quarter, some oil spreads seem to be recovering from the third quarter, when all spreads contracted. In the fourth quarter, the USGC Brent Louisiana Light Sweet, Brent WTI Houston, and Brent Maya spreads have expanded 96%, 16%, and 149% YoY, respectively. However, the Midcon Brent WTI and USWC Brent ANS (Alaskan North Slope) spreads have contacted. While the Brent WTI spread has narrowed by 40% YoY, the Brent ANS spread has turned negative.

Oil spreads also impact Valero’s refining peers. The Midland-Cushing spread impacts refiners such as Delek US Holdings, and Phillips 66 is affected by the WTI Maya and WTI-WTI Cushing spreads.

Peers’ refining earnings indicators

HollyFrontier’s (HFC) and Marathon Petroleum’s (MPC) earnings trends have been mixed this quarter. While HFC’s refining index values have expanded across its regions, all of MPC’s refining indicators have contracted. HollyFrontier’s index values have risen 24%, 33%, and 7% YoY, respectively, in the Midcon, Rockies, and Southwest regions. However, Marathon’s blended crack, sweet prompt differential, and sour prompt differential have contracted by 12%, 63%, and 54% YoY, respectively. To learn more about Marathon, read Has MPC Stock Price Underperformed Peers in 2019?


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