Oil refining stocks have been on the upswing since mid-July, but now they’re in a new phase of growth.
Oil refining and marketing was the best-performing subsector in the S&P 1500 last week. The
VanEck Oil Refiners ETF
(CRAK) is nearing record highs after rising 5% since the start of September.
Smaller refining stocks, which are generally more sensitive to changes in commodity prices, are up even more. Tennessee-based
Delek US Holdings
(DK), for example, has increased 20% this month.
Refineries are benefiting from a shift in crude exports. Saudi Arabia has cut its oil production to 9 million barrels a day, and Russia has reduced output, too—to prop up oil prices. Those countries produce a somewhat heavier grade of oil, which is easier to transform into diesel. U.S. crude is lighter: It can be made into diesel but not quite as efficiently.
Consequently, refiners are struggling to make enough diesel at a time when the global economy has proven resilient and demand is relatively strong. U.S. diesel futures are up more than 40%, to $3.30 a gallon, since they bottomed in May. In the current quarter, crack spreads—a measurement of the difference between crude prices and the prices of the products that refineries make—are up 31% above last quarter, according to Mizuho.
In the New York market, diesel cracks are at $55 per barrel, according to Tom Kloza, global head of energy analysis at OPIS. In San Francisco, they’re at $81.50. In “typical” times, diesel cracks tend to be around $10 to $15, he explained.
Kloza thinks refiners will continue to benefit from strong margins. “I expect epic cracks for diesel and jet fuel to continue.” he wrote in an email. “On balance, US refiners are still enjoying a period that qualifies as a golden age.”
The latest diesel rally isn’t quite as dramatic as the rally last year after Russia’s invasion of Ukraine, when U.S. diesel hit $5.14 a gallon. But analysts seem confident that the good times can keep going for a while, since Saudi Arabia has said it expects to keep its production around 9 million barrels until year’s end.
For the refining stocks, that could mean big investor payouts, both in the form of dividends and buybacks.
“For the third quarter, we have the group at an impressive 13% total capital return yield, with especially strong numbers from
HF Sinclair
(DINO) (24%),
Marathon Petroleum
(MPC) (23%), and
Valero
(VLO) (17%),” wrote Tudor Pickering Holt analyst Matthew Blair.
Write to Avi Salzman at [email protected]
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