American refiners are minting money. The margin they earn turning crude into fuel has just surged to a record high as hostilities in the Strait of Hormuz flare up once again. The stocks tied to that trade are now leading the S&P 500 in July.
Marathon Petroleum Corp. (MPC), Valero Energy Corp. (VLO) and Phillips 66 (PSX) rank among the best-performing names in the index this month.
Marathon is up about 24% in July, Phillips 66 about 23% and Valero roughly 20%. For Marathon, it is the strongest month since 2021.
The VanEck Oil Refiners ETF (CRAK), which holds oil refiners worldwide, has climbed 18.3% in July, putting it on track for its best month since November 2020, when the first Covid vaccine results sent crude and cyclical stocks soaring.
Chart: Oil Refiners Eye Best Month Since November 2020
Why Is The 'Crack Spread' Behind This Move?
The engine behind the refiner rally is the 3-2-1 crack spread.
It measures how much a refiner makes by buying three barrels of crude and selling two barrels of gasoline and one of diesel, and it is the cleanest read on how profitable refining is at any moment.
Matthew Sigel, head of digital assets research at VanEck, said on social media X that the 3-2-1 crack spread "just hit an all-time high of ~$70/bbl, eclipsing the 2022 energy crisis."
When the spread widens, refiners earn more on every barrel they process, no matter how expensive crude itself gets.
The trigger is the blockade of the Strait of Hormuz, the narrow waterway that carries a large share of the world's seaborne oil.
Crude has climbed back toward $80 a barrel as supply tightens, but refined fuel has tightened even faster, and that gap is precisely what a crack spread captures.
Why This is Not Just a War Story
There is a deeper reason the squeeze is so severe.
The U.S. has permanently shut a large slice of its refining capacity over the past several years, leaving far less room to absorb any disruption.
Sigel noted that the country has retired between 1.2 and 1.3 million barrels a day of refining capacity since 2019, the equivalent of closing seven major plants.
What It Means for American Drivers
The same forces lifting refiner profits are already reaching the pump.
AAA put the national average for regular gasoline at $4.00 a gallon on Sunday, up from $3.87 a week earlier and $3.14 a year ago.
Diesel, the fuel most exposed to the current shortage, sits far higher at $5.11.
AAA has tied the climb directly to the Strait of Hormuz, saying the instability there is lifting crude toward $80 a barrel and feeding through to prices at the pump.
What Wall Street Analysts Say
All three refiners are now trading above where analysts think they should be.
Wall Street's consensus price target as tracked by MarketDash on Marathon Petroleum sits at $255, roughly 19% below its recent $315 price. The Street turned more bullish this month, all the same.
Raymond James lifted its target to a Street-high $335 from $300 on July 13 while keeping an Outperform rating, and Citigroup raised its own target to $303 from $257 a day later.
The picture repeats at Valero Energy. Analyst consensus sits at $239, well under the stock's $311 level, yet Raymond James pushed its target to a Street-high $340 from $300 on July 13. Citigroup followed with a move to $302 from $259.
Phillips 66 shows the same stretch, with a consensus target of $179 against a $208 price.
MarketDash Analyst Ratings data (as of Jul 20)
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