Good for ↑
Iran-US tanker strikes pushed US crude up 6.7% in a week, and investors piled into oil producers. The real winners are likely US refiners that use home-grown crude. Middle Eastern crude is getting harder and costlier to ship, so Marathon Petroleum, Valero and PBF Energy could earn more per barrel.
Source: Bloomberg ↗
US crude at $91.48, up 6.7% in a week, already reflects the oil jump. As tanker strikes spread in the Persian Gulf, war-risk insurance for ships crossing the Strait of Hormuz soars. Middle Eastern crude costs more to deliver to refiners in Asia and Europe. US crude, from places like the Permian Basin, becomes relatively cheaper for US Gulf Coast refiners, whose supply avoids the conflict zone. That gap widens the crack spread, the difference between what a refiner pays for crude and what it gets for fuel. Complex Gulf Coast refiners that run lots of US crude, such as Marathon Petroleum (MPC) and Valero (VLO), sell gasoline, diesel and jet fuel against rivals with higher costs. Refiners like these, and PBF Energy (PBF), which only refines, see profits rise fastest when that spread widens. Refiner shares have not yet fully reflected this.
Investors are buying oil producers and big integrated oil companies on the headline jump in oil prices. They expect higher oil to mean higher earnings across energy, with refiners at best a side beneficiary.
Why that may be wrong
Seeing the effect on refiners takes three steps. Analysts must work out how tanker insurance costs feed into crude price gaps, then how those gaps give refiners in each region a cost edge. Most energy stock analysts do not run that model in real time. Share prices react to the US crude price at once, but refiner earnings forecasts take 4-8 weeks to catch up with the wider margins. Refiner shares have shown this lag before during supply disruptions.
If the conflict calms fast, with a ceasefire or a deal within 2-3 weeks, tanker insurance returns to normal. The crude cost advantage would then vanish before it reaches refiner margins. Signs of that would be US crude falling and staying below $85, and the gap between global Brent and US crude prices shrinking back to pre-conflict levels.
US refiners already run near full capacity, so they cannot process much more crude to cash in. Their gain is capped. Worse, if the conflict causes a real drop in demand, through recession fears or airline flight cuts, fuel margins could shrink even as crude rises. Refiners would then face higher costs with no matching revenue. The weakest assumption is that tanker insurance stays high long enough, 6 weeks or more, to widen the gap between Middle Eastern and US crude prices. Insurance markets have adapted quickly before, and Lloyd's insurers absorbed Persian Gulf risk within 3-4 weeks in past episodes. If US crude falls back below $85 on demand fears within two weeks, the case falls apart.
The Tanker War of the Iran-Iraq conflict, which peaked in 1987-1988, is the closest match. War-risk insurance on Persian Gulf tankers rose 400-600% at the peak of the fighting. That acted like an unofficial tax on Middle Eastern crude deliveries. US refiners with access to home-grown crude saw refining margins widen by $4-7 a barrel over 3-6 months. During the 2019 tanker attacks near the Strait of Hormuz, US refiner stocks beat the big integrated oil companies by 8-12% over the next 6 weeks. Each time, conflict at sea gave refiners outside the danger zone a cost edge. It took 4-8 weeks for that edge to show fully in earnings forecasts and share prices.
Iran-US tanker strikes push US crude prices up 6.7% in a week. Investors buy energy stocks broadly, led by big integrated oil companies and oil producers.
War-risk insurance for ships crossing the Strait of Hormuz jumps. Middle Eastern crude costs more to deliver to refiners in Asia and Europe. At the same time, global Brent crude rises further above US crude, which ships without crossing the conflict zone. US Gulf Coast refiners get a lasting edge on input costs.
Large US refiners with complex Gulf Coast plants and home-grown crude supply earn wider margins. They buy relatively cheap US crude and sell fuel into a world market where rival refiners pay more. Earnings forecasts take 4-8 weeks to catch up, so share prices may lag. Rising US jet fuel and diesel prices add more margin for refiners set up to make a lot of these fuels.
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