Wall Street is betting on a strong recovery from the coronavirus pandemic by pouring money into shares of U.S. oil refiners, even though demand for gasoline, jet fuel and diesel remains well below seasonal lows.
Shares of Valero Energy Corp. (VLO) and Marathon Petroleum Corp. (MPC) were trading on Monday at their highest levels since the first week of March. Brokerage Wells Fargo raised its price target on certain independent refiners, saying demand was on an upswing as lockdowns ease across the United States.
“The stock market has definitely priced in an incredibly strong recovery,” said Warren Pies, energy strategist at Ned Davis Research. "Probably more than is taking place."
Refining stocks have typically performed better than exploration and production companies since at least 2016, according to Refinitiv.
“Investors are accustomed to buying refining when they buy energy because it's the only sector that hasn't blown them up in the last ten years,” said a downstream energy investor who requested to remain anonymous.
Many refiners drew down on their cash loads in recent months due to weak demand and poor margins. The refining crack spread, a proxy for margins, is hovering around $11 a barrel, compared with nearly $21 at the same time last year.
U.S. fuel demand dropped by nearly 30% due to lockdowns to manage the pandemic. As of the end of May, gasoline and distillate demand was still 20% lower year-on-year, product exports fell 14% and distillate inventories were at their highest since September 2010, according to government data.
Credit Suisse has lowered second and third quarter earnings estimates for refiners, citing product builds. Analyst Manav Gupta pointed to the closing of a Cheyenne, Wyoming refinery.
"We don’t believe Cheyenne is the last refinery in the U.S. that will be shuttered or converted," he wrote.
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