The macroeconomic backdrop for the refining industry has been constructive since the start of the conflict between Iran and the United States at the beginning of this year. The refining sector continues to gain, primarily due to tight global product markets, significantly constrained excess refining capacity, and lower Persian Gulf product exports due to disruptions through the Strait of Hormuz. The Strait of Hormuz is a critical chokepoint that accounts for nearly one-fifth of global energy flows.

Global Supply Constraints Support Refining Margins

Renewed tensions between Iran and the United States have slowed shipping traffic through the strait, with no clear indication of when the conflict will end, raising concerns about global energy supply. The strength in refining margins in recent quarters reflects product supply disruptions and global refined product inventories at historical lows. In addition, a major catalyst for the supply pressure is the ongoing Ukrainian strikes on Russian refineries. Ukrainian attacks have disrupted refinery operations, contributing to a significant decline in Russian refined product output, at a time when global refining capacity was already constrained.

However, the demand for refined products, including diesel, gasoline and jet fuel, remains robust. These developments have resulted in a significant increase in refined product prices and product crack spreads, which benefits refining players. The 3-2-1 crack spread, widely recognized as an indicator of refining profitability, is significantly higher as compared to the year-ago levels.

Refiners Poised to Benefit From Strong Refining Fundamentals

U.S. refiners are well positioned to benefit in the current refining market environment, and here are three refining stocks worth watching – Valero Energy (VLO Quick QuoteVLO - Free Report) , PBF Energy (PBF Quick QuotePBF - Free Report) and Marathon Petroleum Corporation (MPC Quick QuoteMPC - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Valero Energy is among the largest independent refiners in the United States, having a combined high-complexity throughput capacity of nearly 3 million barrels per day across its refineries. Its refining footprint is heavily concentrated along the U.S. Gulf Coast and the Midcontinent, offering feedstock sourcing advantages and access to a diverse range of feedstocks, including Venezuelan and Canadian crude. VLO’s complex refineries are well-positioned to process discounted heavy crude grades into higher-quality refined products. Moreover, its Gulf Coast access and logistics network enhance product placement and margin capture. This positions Valero to benefit from elevated refining margins and strong domestic and international demand for refined products.

PBF Energy has a broad refining footprint comprising six refineries, with a processing capacity of nearly 1 million barrels per day. Its refineries have a combined Nelson Complexity Index of 12.8, indicating they can process a wide variety of feedstocks into higher-value refined products. In its latest earnings call, management noted that PBF’s footprint provides access to stable crude supplies to keep its operations running smoothly. Management believes that the constructive refining setup is expected to persist, as replenishing product inventories and rebuilding damaged refining infrastructure will take time. These factors are expected to provide continued support to refining margins, aiding PBF’s profitability.

Marathon Petroleum stands out as the operator of one of the largest and most diversified U.S. refining systems, with a combined capacity of 3 million barrels per day across the Gulf Coast, Mid-Continent and West Coast. Its integrated system across three regions enables it to optimize crude sourcing and product placement. On its second-quarter earnings call, management also highlighted the flexibility of MPC’s refining system to process a wide range of crude grades, allowing it to use cost-effective feedstocks for its operations to maximize profitability. Furthermore, its Gulf Coast and West Coast assets can serve both domestic and international product markets, providing additional flexibility to capitalize on regional supply-demand imbalances.