Refining stocks hit record highs as gasoline, diesel prices soar

Published Mon, May 9 202211:27 AM EDTUpdated Mon, May 9 202212:49 PM EDT

Refining stocks are surging as gasoline, diesel and jet fuel prices rise , increasing profitability for companies that turn crude oil into petroleum products that consumers use daily. The group came under pressure Monday amid a broad-based market sell-off, but they're still trading around record levels. Valero and Marathon Petroleum hit all-time highs on May 6 and May 5, respectively, during what was otherwise a bleak week for the broader market. Phillips 66 , meantime, hit the highest level in more than two years on Thursday. High oil prices are not necessarily good for refiners, since it means their input costs rise. But now, gasoline, diesel and jet fuel prices are rocketing higher, meaning profit margins for the refiners are jumping. "Near-term refining margins have spiked to extraordinary levels," Bank of America wrote in a May 2 note to clients. "The impact on refiners is palpable," the firm added. The surge in gasoline, diesel and jet fuel prices is due to a confluence of factors, some of which were present before Russia invaded Ukraine, which then further destabilized global energy markets. Refining capacity is down, demand has bounced back following the pandemic and inventory levels are depleted. "Refining capacity has fallen sharply since the start of Covid, and the system is now behaving as though capacity has effectively run out," Morgan Stanley wrote in a recent note to clients. "This is not easy to solve quickly, especially if demand recovers further," the firm added. Retail diesel prices hit a record $5.54 per gallon on Monday, according to AAA . That follows a week in which a new high was set every day. The national average for a regular gallon of gasoline is now $4.328, less than a penny below March's record high. Stephen Brennock at brokerage PVM noted that diesel is now selling for the equivalent of about $175 per barrel of oil. The difference between heating oil futures, a proxy for diesel prices, and West Texas Intermediate crude is now at a record above $70 a barrel. This difference, known as the crack spread, is a key metric for refiners. "The product margin setup into the summer looks to be the best in over a decade," Citi said in an April 26 note to clients. "Record high diesel cracks look ready to spill over to the gasoline market, and global spare capacity has tightened in the intermediate term." The firm's top pick is Marathon Petroleum, due to what Citi sees as a "discounted trading multiple versus peers." The firm said coming quarters should result in that gap narrowing. Citi also holds a buy rating on Valero, which is Bank of America's top pick in the industry. The firm said Valero's position as the largest pure-play refiner makes it more attractive than Marathon Petroleum or Phillips 66. Bank of America added Valero to its U.S. 1 List — top equity ideas across sectors — on March 8. "We see Valero as the best positioned within the large cap refiners to exploit the rate of change we see occurring in the refining margin environment," the firm said. Shares of Valero declined 6% on Monday, while Marathon Petroleum slid 4%. Phillips 66 shed 5%. - CNBC's Michael Bloom contributed reporting.

The Valero Energy refinery in Texas City, Texas.

F. Carter Smith | Bloomberg | Getty Images

Refining stocks are surging as gasoline, diesel and jet fuel prices rise, increasing profitability for companies that turn crude oil into petroleum products that consumers use daily.

The group came under pressure Monday amid a broad-based market sell-off, but they're still trading around record levels.