Valero sees strong margins in 2023 as US refiners maintain advantage over Europe

27 Jan 2023

Quantum Commodity Intelligence - Valero expects firm refining margins to continue for 2023, as the US refining sector is likely to enjoy further advantages over its European counterparts, according to senior company officials speaking on a call with analysts following its record Q4 profits announcement.

The San Antonio-based refiner said it expects margins to remain at elevated levels in 2023, amid global tightness in refined products, which in turn is heightened by the upcoming EU ban on Russian petroleum products.

Valero’s refining margin in Q4 2022 rocketed 141% year-on-year to $21.82/b, while crude runs hit 3.04 million bpd on a 97% utilisation rate – its highest since 2018.

"Looking ahead, we expect low product inventories and continued increase in product demand to support margins, particularly for US coastal refiners," Chief Executive Officer Joseph Gorder said.

Gorder also said on Thursday’s earnings call that the company continues to see “large discounts” for heavy sour crude oils, as European refiners favored easier-to-process lighter crudes due to the higher cost of natural gas outside of the US.

“Our refining system also benefited from heavily discounted sour crude oils and fuel oils. These discounts were driven by increased sour crude oil supply, high freight rates, and the impact from the IMO 2020 regulation for lower sulfur marine fuels,” added Gorder.

“High natural gas prices in Europe incentivize European refiners to process sweet crude oils in lieu of sour crude oils, adding further pressure on sour crude oils.”

While natural-gas prices in Europe have slumped in recent weeks, benchmark Dutch TTF prices are still around seven times higher than US Henry Hub futures, giving US refiners a significant advantage in operating costs.

Valero noted refining cash operating expenses of $5/b in Q4 were $0.14/b above Q4 2021, primarily attributed to higher natural gas prices.


US refining capacity has been curtailed this year, as a slow recovery after winter storms at the end of December has been compounded by several planned and unplanned outages.

“The market is very, very tight. We're looking at total light product inventories 55 million barrels below the five-year average,” said Gary Simmons, Executive Vice President & Chief Commercial Officer.

“Typically, this is a period of time where you see restocking take place. And with the winter storm outage and high maintenance activity, we (the US) just haven't been able to restock inventories which sets the year up very nicely in terms of refinery margin perspective,” added Simmons.

Asked about competition in the global marketplace from Chinese refiners, Simmons said: “I think we've certainly seen the Chinese more active in the market, both purchasing feedstocks and in the product markets as well.

“It looks to us like a lot of the product exports from China are staying in the region, although we occasionally see some exports making their way into our market. But our view is that you'll see significant demand recovery in China by the second quarter. And a lot of that ramp-up in refinery utilization in China will be needed to supply the domestic demand.”

Simmons also said there was little threat from new refining capacity, as domestic demand outpaces capacity additions.

“We're not too concerned about it. A lot of that capacity really doesn't make a lot of transportation fuels. Some of the big refineries in China, it's less than 50% total gasoline, jet and diesel yield, a lot more petrochemicals and fuel oil production.”