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US-Iran Framework Deal to Reopen Hormuz: 2 Refining Stocks to Bet On
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Key Takeaways
A U.S.-Iran framework deal may reopen Hormuz, boosting oil supply and weighing on crude prices.
VLO expects strong refining margins as spare capacity is limited and fuel inventories remain low.
MPC can process cheaper U.S. and Canadian crude to produce diesel and jet fuels in demand.
The United States and Iran have agreed on a framework deal to end the war and eventually reopen the Strait of Hormuz, which is responsible for the passage of significant oil volumes that are consumed across the globe. The signing of the deal will likely be on Friday in Switzerland, according to Pakistan Prime Minister Shehbaz Sharif. So, once the oil starts flowing, there will be more supply, leading to declining commodity prices. Amid the backdrop, should you bet on the two leading refiners, Valero Energy Corporation (VLO - Free Report) and Marathon Petroleum Corp. (MPC - Free Report) ? Let’s delve deeper.
Oil Price Slipped to $80: Why?
The price of West Texas Intermediate crude is now hovering around the $80-per-barrel benchmark, reflecting a sharp decline from the more than $100 per barrel mark a month ago. The peace deal that will likely be signed officially soon is strongly backing the decline in the commodity price.
Although the price of oil is still high, it’s just more than 20% decline, which is definitely having a much bigger impact on the energy business landscape.
Constrained Global Refining Capacity
The global refining capacity is constrained, and fuel inventories are low. On the demand side, gasoline, diesel and jet fuel remain resilient. This means people are still driving and flying quite often, while diesel demand suggests transportation, freight, agriculture and industrial activity are still holding up. As a result, with busy refineries and fuel not in abundant supply, refining margins for refiners are quite strong.
Thus, with crude prices dropping significantly, investors should allocate their money to refining players like Valero Energy and Marathon Petroleum, even though the pricing environment of crude oil is still highly profitable for exploration and production activities. This is because, with plummeting oil prices, refiners’ input costs have declined considerably.
2 Refiners in the Spotlight: VLO, MPC
Valero Energy expects to generate strong refining margins as the world has very little spare refining capacity, while inventories of refined products such as gasoline, jet fuel and diesel are low. VLO will likely benefit from strong demand and tight supply, given its large, complex refineries with the capacity to process discounted heavy sour crude oil.
Valero Energy, sporting a Zacks Rank #1 (Strong Buy), has jumped 11.3% in three months and could see further upside.
Marathon Petroleum runs refining systems that are the largest in the United States. With high utilization of refineries, Marathon Petroleum is well-positioned to capture almost all of the available profitable opportunities. On its first-quarter earnings call, the leading refining player mentioned that roughly 6% of the world’s ability to produce finished fuels went offline due to the conflicts in the Middle East.
Investors should note that the company has the capability of processing cheaper crude from the United States and Canada to produce diesel and jet fuels that are in high demand. The firm currently sports a Zacks Rank of 1 and may have room for further gains. You can see the complete list of today’s Zacks #1 Rank stocks here.
View the Zacks #1 Rank List
Image: Bigstock
US-Iran Framework Deal to Reopen Hormuz: 2 Refining Stocks to Bet On
Key Takeaways
The United States and Iran have agreed on a framework deal to end the war and eventually reopen the Strait of Hormuz, which is responsible for the passage of significant oil volumes that are consumed across the globe. The signing of the deal will likely be on Friday in Switzerland, according to Pakistan Prime Minister Shehbaz Sharif. So, once the oil starts flowing, there will be more supply, leading to declining commodity prices. Amid the backdrop, should you bet on the two leading refiners, Valero Energy Corporation (VLO - Free Report) and Marathon Petroleum Corp. (MPC - Free Report) ? Let’s delve deeper.
Oil Price Slipped to $80: Why?
The price of West Texas Intermediate crude is now hovering around the $80-per-barrel benchmark, reflecting a sharp decline from the more than $100 per barrel mark a month ago. The peace deal that will likely be signed officially soon is strongly backing the decline in the commodity price.
Although the price of oil is still high, it’s just more than 20% decline, which is definitely having a much bigger impact on the energy business landscape.
Constrained Global Refining Capacity
The global refining capacity is constrained, and fuel inventories are low. On the demand side, gasoline, diesel and jet fuel remain resilient. This means people are still driving and flying quite often, while diesel demand suggests transportation, freight, agriculture and industrial activity are still holding up. As a result, with busy refineries and fuel not in abundant supply, refining margins for refiners are quite strong.
Thus, with crude prices dropping significantly, investors should allocate their money to refining players like Valero Energy and Marathon Petroleum, even though the pricing environment of crude oil is still highly profitable for exploration and production activities. This is because, with plummeting oil prices, refiners’ input costs have declined considerably.
2 Refiners in the Spotlight: VLO, MPC
Valero Energy expects to generate strong refining margins as the world has very little spare refining capacity, while inventories of refined products such as gasoline, jet fuel and diesel are low. VLO will likely benefit from strong demand and tight supply, given its large, complex refineries with the capacity to process discounted heavy sour crude oil.
Valero Energy, sporting a Zacks Rank #1 (Strong Buy), has jumped 11.3% in three months and could see further upside.
Marathon Petroleum runs refining systems that are the largest in the United States. With high utilization of refineries, Marathon Petroleum is well-positioned to capture almost all of the available profitable opportunities. On its first-quarter earnings call, the leading refining player mentioned that roughly 6% of the world’s ability to produce finished fuels went offline due to the conflicts in the Middle East.
Investors should note that the company has the capability of processing cheaper crude from the United States and Canada to produce diesel and jet fuels that are in high demand. The firm currently sports a Zacks Rank of 1 and may have room for further gains. You can see the complete list of today’s Zacks #1 Rank stocks here.