The energy sector has seen significant benefits from high oil prices this year, particularly due to geopolitical tensions, such as Iran’s closure of the Strait of Hormuz. Among the various subsectors within this industry, refiners stand out for their exceptional performance, with the VanEck Oil Refiners ETF (CRAK) showing a 24% increase since the onset of the U.S.-Iran war, compared to a 9% rise in the overall energy sector and a modest 7.5% increase in the S&P 500.
Key players in the refining space, such as Marathon Petroleum (MPC), have seen remarkable gains—up 59%, while Valero Energy (VLO) is up 52% and Phillips 66 (PSX) has risen by 36%. The primary driver behind this success is crack spreads, the profit margin refiners earn by converting crude oil into refined products like gasoline and diesel. Particularly, the commonly referenced 3-2-1 crack spread, indicative of converting three barrels of crude into two barrels of gasoline and one barrel of a distillate, has significantly widened due to market conditions.
Currently, there is a global shortage in refining capacity, influenced by factors such as ongoing conflicts and aging infrastructure. This has caused the crack spread for U.S. refiners to reach approximately $64, representing a new high, as there is insufficient refining capacity to meet global demand.
Analysts are optimistic about refining stocks; for instance, Goldman Sachs recently increased its price target for Valero, indicating an estimated upside from current levels. While oil prices remain volatile, investing in refiners appears to be a promising opportunity, driven by the ongoing global refining shortage that is projected to persist.
