Refiners like Valero Energy and Phillips 66 have enjoyed an epic rally this year. Investors who've been lucky enough to own these stocks ought to screw on their gas caps and drive away.
Everything has gone right for the group. Crude oil is up almost 80% in 2026, but gasoline and diesel prices have risen even higher, with the Iran and Ukraine wars taking a bite out of the global refining business. Phillips 66 shares were up 130% on the year through Oct. 14, while Valero and Marathon Petroleum had nearly tripled.
They've started to give back some of those gains. The VanEck Oil Refiners exchange-traded fund fell 3.7% on Tuesday, its worst day in over a year, and Valero plunged 9%. The problem is that the Trump administration, concerned about the inflation impacts of high energy prices, has allowed Russia to sell some diesel to the U.S. and has successfully pressured Ukraine to stop attacking Russian refineries, while Russia has granted exemptions to its self-imposed diesel export ban.
Meanwhile, U.S. gasoline inventories have been building as demand drops, probably because high prices are dissuading drivers. So even as crude oil has risen 9% in October, U.S. diesel futures are essentially flat and gasoline is down 8%. That reduction in the so-called crack spread means smaller margins for the refiners, who "crack" the first into the second and the third.
"The pressure got taken off just a bit, which is why you've had this tremendous move lower," says longtime energy trader Anthony Grisanti, who adds that crack spreads nonetheless remain well above historical norms.
Refiners' third-quarter earnings have provided the expected parade of massive revenue and profit growth, as Barron's predicted back in August. Importantly, the refiners are maintaining level heads in the midst of the earnings bonanza, and continue to boost dividends and buybacks.
"I wouldn't say we're going to sell the refiners, because we still think they will have high refining margins for a while, but they've obviously had a heck of a run," says Rob Thummel, senior portfolio manager at Tortoise Capital. Both the Iran and Ukraine conflicts have been trending toward resolutions, and Thummel says that more-lasting peace agreements could come after the midterm elections -- thus cutting into both oil prices and crack spreads.
Grisanti likewise says that while he wouldn't buy the refiners now, he wouldn't sell them, either. "One or two things could cause these stocks to go higher once again," he says. "The world's a fragile place right now."
Fair enough. But even if world leaders aren't ready to break out into the chorus of "Peace Train," the geopolitical environment has been so bad that even a moderate improvement could have a big impact. That's good for the world, and bad for the refiners. Their businesses still look terrific, but investors ought to look for greener pastures.
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