While the cutoff of Russian crude oil has left a hole in Valero’s supply, the San Antonio-based energy company says alternatives are available in Latin America, the Middle East and Canada.
The refiner is among those knocking on Ecuador’s door to secure new supplies, Fortune reported Wednesday.
Market uncertainty over the full effects of Russia’s invasion of Ukraine have pushed oil prices to more than $100 a barrel, their highest level in 14 years, causing U.S. drivers to feel more than a pinch at the pump.
Valero said the supply chain could take a month or longer to adjust, considering transportation and logistics questions. And experts say oil prices are likely to remain high for months at the least.
Before the cutoff, Valero was the United States’ largest importer of Russian oil and petroleum, representing about 41% of U.S. imports from Russia, say analysts from Houston-based energy firm Tudor, Pickering, Holt & Co.
Valero’s share last year represented nearly 15 million barrels of oil imported. The next largest importer, Exxon Mobil, imported less than half of that, responsible for 17% of U.S. imports.
Valero is San Antonio’s largest publicly traded company and the world’s largest independent petroleum refiner, though it is also expanding into the renewable fuel industry. The company says it is North America’s largest producer of renewable fuels, and the world’s second largest producer of sustainable diesel.
Valero previously relied on Russia for nearly 13% of its crude oil imports, behind Mexico and Iraq, which provide the highest percentage of the company’s imported oil, according to 2021 figures from the U.S. Energy Information Administration. Valero also refines oil extracted in the U.S.
Zooming out, U.S. reliance on Russian oil was still relatively small. Russia, despite being the world’s third-largest oil producer, only made up about 3% of U.S. imports of crude oil and petroleum products.
At least a week before the United States banned imports of Russian fuel on March 8, Valero Energy was among the first refiners to voluntarily discontinue purchases of Russian oil.
“This was a self-imposed restriction by us,” a company spokesman explained.
Looking to Latin America
To plug that gap, Valero is among the U.S. refiners rushing to secure a supply from Ecuador, according to the Fortune report. The oil trading manager of Ecuador’s state oil company, EP Petroeducador, told the publication he had held back-to-back meetings with several refiners and trading houses. He said Valero is seeking a supply contract.
Ecuador, a former member of OPEC, reportedly plans to boost its oil production as barrels continue to trade for more than $100, notwithstanding some recent fluctuations. Ecuador also produces an alternative to heavy crude oil that could be especially valuable to refineries like those operated by Valero.
“Complex refineries were built to handle a certain amount of heavy oil,” said Eric Smith, associate director of the Tulane Energy Institute. “We don’t need a lot, but we need some.”
Without some amount of heavy crude oil running through Valero and similar refineries’ equipment, some of those machines rest idle, he explained, forcing the rest of the refinery’s operations to cover the cost of their maintenance.
Canada is another source of heavy crude oil, he said, but shipping it is expensive.
Company prospects mixed
When crude prices go up, as they are now, refining companies’ margins are initially squeezed because of a lag in product prices.
Still, some securities analysts have put out sunny assessments of Valero’s prospects, and the company’s stock price has risen in recent days to its highest point in over a year, closing Friday at $90.43.
Bank of America analyst Doug Leggate wrote earlier this month that Valero is “positioned to exploit the risk of a permanent reset in crude flows from Russia” because it could indirectly lead to a lower price on a special oil product, residual oil, that Valero is well-equipped to process.
Morgan Stanley analyst Connor Lynagh also said U.S. refiners could benefit from the pain now being felt by European refineries, who relied on a much higher percentage of Russian oil. Valero in specific “has a strong ability to manage potential volatility” and has already begun adapting to market shifts, Lynagh said.
Despite the market uptick, Tulane’s Smith said he saw little room for refiners like Valero to actually make a profit off the disruptions. “We can re-optimize our refineries and minimize impact, but it will still be a negative impact, “ he said.
Keep in mind also that if prices at the pump stay too high for too long, some polls show, consumers could cut back on driving — spelling trouble for refiners like Valero.
For drivers, prices to stay high
Pump prices in San Antonio averaged around $3.93 yesterday, according to Texas AAA, having fallen slightly from their all-time record high of nearly $4 last weekend.
As a result, the Biden administration has urged oil companies to step up production.
“Crude prices remain volatile as uncertainty lingers over the loss of Russian crude oil and rising concerns about global supply,” said AAA Texas spokesman Daniel Armbruster in a statement.
He added that gas prices tend to increase in the spring, and that AAA expects prices to at least partially decline after the summer, following historic trends. “However, if crude remains high, so will prices at the pump,” he added.
The U.S. Energy Information Administration forecasts gas station prices to rise slightly above $4 into May before falling through the rest of the year. The bureau said if this occurs, the average 2022 pump price will be the highest it’s been since 2014, adjusting for inflation.
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