2 Refining Stocks With 35%+ Upside in 6 Months Despite High Oil Prices
The Iran war shock is driving high crude oil prices, with West Texas Intermediate (“WTI”) crude currently trading at more than $85 per barrel. The U.S. Energy Information Administration (“EIA”) in its latest short-term energy outlook projected WTI at $88.32 per barrel this year, higher than $65.40 last year.
Thus, with oil prices likely to remain elevated, refiners could see pressure on their overall business. However, that does not appear to be the case. Notably, over the past six months, leading refiners such as Valero Energy CorporationVLO and Marathon Petroleum Corp.MPC have each witnessed more than 35% gains despite a highly favorable crude pricing environment. Let’s delve deeper.
Six-Month Price Chart
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Constrained Global Refining Capacity
The global refining capacity is constrained, and fuel inventories are low. On the demand side, gasoline, diesel and jet fuel remain resilient. This means people are still driving and flying quite often, while diesel demand suggests transportation, freight, agriculture and industrial activity are still holding up. As a result, with busy refineries and fuel not in abundant supply, refining margins for refiners are quite strong.
Thus, surprisingly, with crude prices likely to remain high, investors shouldn’t allocate their money only to exploration and production companies but also to refining players like Valero Energyand Marathon Petroleum, even though high crude prices have been increasing refiners’ input costs.
Time to Bet on 2 Refiners: VLO, MPC
Valero Energy expects to generate strong refining margins as the world has very little spare refining capacity, while inventories of refined products such as gasoline, jet fuel, and diesel are low. VLO will likely benefit from strong demand and tight supply, given its large, complex refineries with the capacity to process discounted heavy sour crude oil.
Over the past six months, Valero Energy, sporting a Zacks Rank #1 (Strong Buy), jumped 47.6%, outpacing the energy sector’s 22.2% gain.
Marathon Petroleum runs refining systems that are the largest in the United States. With high utilization of refineries, Marathon Petroleum is well-positioned to capture almost all of the available profitable opportunities. In its first-quarter earnings transcript, the leading refining player mentioned that roughly 6% of the world’s ability to produce finished fuels went offline due to the conflicts in the Middle East.
Investors should note that the company has the capability of processing cheaper crude from the United States and Canada to produce diesel and jet fuels that are in high demand. The stock surged 38% over the past six months and currently sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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