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U.S. oil refiner stocks are facing some of the most unique dynamics the industry has seen in years. On balance, the dynamics are positive for the industry, and the stocks have been rising. If the Ukraine crisis continues, their results are likely to stay strong.
Refinery stocks perform somewhat differently from other kinds of oil stocks. Producers and oil service companies tend to rise on higher oil prices and activity. For refiners, crude oil is an input price, so the stocks don’t necessarily rise just because overall prices are up. They need prices for products like gasoline, diesel and jet fuel to rise too. Refiners do best when demand is rising for products, and margins for those products are on the upswing too.
The demand picture looks good now, as Covid-19 ebbs and airline traffic picks up. But the bigger reason U.S. refinery stocks are up is that they’re taking advantage of an inefficiency in one of their input prices.
Natural gas prices are particularly high in Europe, because of the Russian invasion of Ukraine. Europe was already facing a gas shortage before the war, because gas supply has been low around the world and Europe is competing with Asian importers for scarce supplies. But the Russian invasion has caused even more uncertainty in the market and caused prices to rise further.
European refineries run on natural gas, so their costs are rising now. Because of that cost increase, they’ve boosted the price of products like diesel. U.S refiners also run on natural gas, but they have access to much cheaper supply, because the U.S. is the largest producer of natural gas and the prices here are much lower than they are overseas. So U.S. refiners benefit from the overall rise in prices for products while paying much lower input costs. That’s led to sky-high margins in recent weeks, and rising stock prices.
In addition, uncertainty about Russian energy exports has led to the prices of certain refined products like diesel rising sharply in recent weeks, further boosting refinery margins.
“Russia exports almost exactly a million barrels a day of diesel to the world,” said Matthew Blair, energy analyst at Tudor Pickering Holt & Co. “That’s about 4% of global diesel consumption. For the average layperson, 4% doesn’t sound like a lot. But for this kind of a business potentially taking 4% of global distillate supply out of the pool is a big deal. And it’s coming on a distillate market where inventories are super low to begin with.”
U.S. refinery stocks have done well this year. Small-cap PBF Energy (PBF) is up 68%, Valero Energy (VLO) and Marathon Petroleum (MPC) have risen 17%, and Phillips 66 (PSX) is up 4.5%.
One exception is Par Pacific (PARR), a small refinery company whose stock is down 26% this year. Par, which has refining operations in Hawaii, has historically imported more Russian crude than its rivals—about 14% of the products that run through its refineries, according to Blair. That’s largely because of the proximity of Russia to its Hawaii operations, Blair said. Russia accounts for 8% of Valero’s throughputs, and an even smaller amount at other companies, Blair said.
Beyond exposure to Russia, there are other reasons the current market poses problems for refiners—though not enough to outweigh the benefits of growing product margins. The oil futures market is now trading in a pattern called backwardation, where prices for contracts many months in the future are lower than current prices. For refiners, that poses a problem because they need to hold some of the crude they buy in storage and thus the product they are holding is steadily diminishing in value. “Every month that’s a little bit of a headwind,” Blair said.
For now, the positive factors are outweighing the negatives for most of the companies, however.
Write to Avi Salzman at [email protected]