(Reuters) -U.S. refiner Valero Energy Corp’s quarterly earnings blew past Wall Street expectations on Tuesday, as margins strengthened on increasing tightness in U.S. refining capacity amid rising demand and lower worldwide product supply.

Refiners’ earnings are expected to remain strong in coming quarters as sanctions on Russia following its invasion of Ukraine have cut global product inventories at a time when fuel demand has rebounded to near pre-pandemic levels. In addition, numerous facilities have closed in the last year, boosting profitability for existing refiners.

Valero’s quarterly refining margin more than doubled to $3.21 billion from a year earlier.

Analysts are looking for bigger returns in the second quarter as Valero ends planned first-quarter maintenance at its refineries and the United States moves into the summer driving season.

Paul Sankey of Sankey Research said he expects Valero’s earnings before interest, taxes, depreciation and amortization (EBITDA) to hit $3.5 billion, or $5 per share, in the second quarter.

“For the first time in 20 years covering the U.S. refiners, we are making an explicitly supply-side argument that U.S. refining capacity is structurally tight,” Sankey wrote in a Tuesday morning note.

For the first quarter, Valero realized adjusted net income of $944 million, or $2.31 a share, on revenues of $38.5 billion. A year ago, when the world was laboring under restrictions to limit the COVID-19 pandemic, Valero saw an adjusted net loss of $666 million, or $1.64 a share, on revenues of $20.8 billion.

Five U.S. crude oil refineries have shut in the past 20 months, and last week Lyondell Basell Industries announced plans to shutter its Houston refinery by the end of 2023 as it has been unable to find a buyer for the plant.

Existing capacity can’t stretch very much to meet increases in demand, said Gary Simmons, Valero’s chief commercial officer during Tuesday’s call.

“It’s hard to see that refinery utilization can increase much,” Simmons said. “We’ve been in this 93% utilization … generally, you can’t sustain it for long periods of time. So I don’t think there’s a lot of room on refinery utilization in terms of increasing supply. I think the markets will have to balance more on the demand side.”

Valero, the first major U.S. refiner to post quarterly results, said its total refinery throughput volumes averaged 2.8 million barrels per day (bpd) in the quarter ended March 31, 390,000 bpd higher than a year earlier.

Homer Bhullar, Valero’s vice president of investor relations, said the company’s 14 refineries may operate up to 89% of combined total capacity of 3.18 million bpd in the second quarter.

The company’s refining segment posted adjusted operating income of $1.47 billion, compared with an adjusted loss of $506 million in the year-ago period. Its per-barrel refining margin was $12.74 in the first quarter, compared with $6.91 for the year-ago period.

“The fundamentals that drove strong results in the first quarter, particularly in March, continue to provide a positive backdrop for refining margins,” Chief Executive Officer Joe Gorder said in a statement.

Rivals Phillips 66 and Marathon Petroleum Corp are also expected to post a quarterly profit compared to year-ago losses.

Valero shares were up 5.1% to $106.07 in afternoon trading in New York.

(Reporting by Rithika Krishna in Bengaluru and Erwin Seba in HoustonEditing by Shailesh Kuber, Mark Potter and Andrea Ricci)

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