UPDATE 1-Valero cuts gasoline output due to poor margins

Tue Mar 11, 2008 5:26pm EDT

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NEW YORK, March 11 (Reuters) - Valero Energy Corp. (VLO.N), the largest refiner in the United States, has slightly reduced gasoline production from its refineries as soaring crude prices weaken profit margins, the company's CEO said on Tuesday.

The move comes even as prices for gasoline at the pumps soar through record highs. [ID:nN11560905]

Bill Klesse, Valero's chairman and chief executive officer, told reporters at the National Petrochemical and Refiners Association meeting that recent negative profit margins in the Upper Midwest forced Valero to slightly curtail rates at some fluid catalytic cracking units.

"I don't feel the obligation that we have to run at a loss and our shareholders would not expect us to run at a loss," Klesse said. He added he expected profit margins to improve heading into summer, when road travel typically peaks.

Although Klesse did not specify which refineries are running at reduced rates, he noted that the Chicago gasoline crack spread -- an indication of profit margins -- was negative for much of February.

U.S. refining profitability has been running well-below the last year's levels as an economic slowdown dampens fuel consumption and oil prices vault to record heights.

Crude oil hit a new peak near $110 per barrel on Tuesday amid an increase in speculative investing in commodities and concerns that world energy consumption will outpace new supply. [O/R]

Valero has had to obtain additional lines of credit as crude oil prices catapult to new records.

"$110 oil is clearly stretching our working capital," Klesse said. "We are still buying the same amount of oil, but with the price, we are exceeding our credit limit."

Klesse said the company has not experienced any difficulties meeting its oil demand, but said the price of oil has been driven artificially high by market speculation.

Klesse said he expects an increase in refining margins for the spring and summer months of April, May, and June, as retail gasoline demand increases.

"My expectation is that (gasoline) prices, because of crude oil, are going to be higher this summer," Klesse said.

The U.S. government's Energy Information Administration said pump prices are likely to exceed $4 a gallon in some regions, with the average U.S. price to peak at $3.50 by this spring, at the beginning of the traditional driving season. [ID:nWAT009104] (Reporting by Rebekah Kebede; Editing by Marguerita Choy)

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