MW Investors should seek to profit from this overlooked sector, according to hedge-fund CIOs
By Jules Rimmer
U.S. refining stocks are enjoying bumper margins as the global oil crisis deepens
U.S. refiners are more efficient than their global competition, and, in this present period of elevated cracking spreads, this is generating a significant uptick in profitability.
There's a global shortage of refinery capacity. While this has been aggravated by the crisis in the Persian Gulf, the trend was well-established beforehand, and investors should look to exploit the long-term supply-demand imbalance by buying refinery plays that may achieve windfall profits.
Cracking spreads have been widening for most of 2026.
The advice from Harris Kupperman, chief investment officer at Praetorian Capital, and Roderick van Zuylen, chief investment officer at Night Watch Capital, is to focus on that multiyear direction - to "get some exposure and don't "overthink it."
Buy the biggest, most obvious stocks that the large passive funds will be obliged to invest in because, if the theme works, these heavyweights will make money rather, the advice goes. Don't spend precious time truffling for value in small-cap stocks of more dubious quality that may or may not work out
For now, Kupperman identifies Valero $(VLO)$ and Marathon $(MPC)$ as the big, obvious stocks.
The trading call on refining as an industry was the standout takeaway from the conversation these two CIOs had with host Jack Farley on the "Monetary Matters" podcast that aired Wednesday. The rationale behind the trade is that, while the present geopolitical turbulence is providing a real boost to refiners, the structural trend is for market tightness (not enough refineries so margins are better) and wider crack spreads (the difference between the price of the crude (BRN00) (CL00) input and the refined output).
Refineries turn crude oil into products like jet fuel, diesel and gasoline, and right now, van Zuylen pointed out, these cracking spreads are "insanely high" and are driving profitability.
Looking beyond the current dynamics caused by the effective closure by Iran of the Strait of Hormuz, the more lasting trend of supply/demand imbalance is owing to a multiplicity of factors.
First is the green-energy theme, transitioning away from fossil fuels. Then there's the high cost and long timeline necessary to build refineries (between five and seven years). Moreover, refineries in places like Mexico and Nigeria tend to underperform in terms of capacity utilization, while U.S. refineries, especially those in PADD 3 (the Gulf Coast Petroleum Administration for Defense Districts), run at around 95% capacity utilization.
Both fund managers referenced Russia, whose refineries Ukraine is relentlessly targeting with drone attacks. They also note that there are smaller, inefficient refineries in the U.S. and Europe that are closing down or being converted to biofuels, thereby shrinking further the pool of facilities able to process heavy crude into high-demand products like jet fuel and diesel.
From the archives (April 2026): Could a jet-fuel shortage turn your European summer vacation into a nightmare?
The managers agreed that, right now, refiners are valued at less than replacement cost, so it's cheaper to buy an existing stock than it is to build a new facility. The analyst community has not consistently upgraded its forecasts to account for the much wider crack spreads now being achieved. Kupperman added that there's an extremely wide dispersion of analyst estimates for Marathon and that this could lead to surprises in the research community as results are announced.
Kupperman made the argument that, even if the Iran war ends soon, even just a few quarters with spreads where they are now, rising from $15 to $55, would be hugely impactful for such refiners as Marathon and Valero. He can envisage them generating enough cash to erase their debt or launch significant share buybacks, he said. And, because these two companies in particular are so large, they attract passive funds even as the float becomes smaller, driving share prices reflexively higher.
Two final observations by the traders: First, don't abandon these stocks the moment the war ends, because that won't change the industry dynamic for a good while. Instead, Kupperman argued, wait for the addition of new refining capacity as the trigger to sell. Second, this sector is overlooked because Wall Street is laser-focused on AI and tech right now. Refiners are not generating the attention these crack spreads warrant.
So far in 2026, Marathon has returned 51%, but in Thursday premarket trades it is down 2% at around $240. Valero has delivered 45% so far this year and is looking 1.4% lower in premarket indications at $233.
-Jules Rimmer
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 07, 2026 08:51 ET (12:51 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments