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Will The Recent Rally In Valero Energy Shares Last?

Shares of Valero have started to climb back up in recent weeks.

The fall in crack spreads and lower Brent/WTI gaps haven't stopped the stock from slowly rising again.

The company's next earnings report, which will come out at the end of month, is expected to show another set of strong quarterly earnings.

After shares of Valero Energy (NYSE:VLO) fell from a high of over $70 back in August, they started to climb back up in the past few weeks. The recent increase in the price of oil, the decline in the spread between Brent and WTI, and lower RBOB gasoline crack spreads haven't curbed the VLO rally. The upcoming earnings report for Q3, which will be released on Oct. 28, is estimated to show earnings of $2.54 per share -- up by $0.54 from the same quarter last year. Considering the high crack spreads back in Q3 and the ongoing share buybacks (and their artificial impact on EPS), the company might even show higher-than-expected EPS. But if spreads keep falling, the stock could suffer. Let's examine the recent developments related to Valero.

Crack Spreads

Even though gasoline consumption rose and there was a series of unplanned refinery maintenance issues in the past couple of months, gasoline inventories kept building up according to the last EIA market price and uncertainty report. The buildup in motor gasoline inventories -- which, in part, stemmed from higher imports and new highs in net production -- helped pressure the short-term crack spreads lower, as indicated in the chart below.

Source: Quandl and Google...