Bombs Hit Oil Refineries

Christian DeHaemer

Posted March 21, 2024

Bombs Hit Oil Refineries

About a week ago Ukraine sent 35 drones to attract Russian oil and electricity infrastructure.  Reuters estimated that the attacks halted 7% of Russian refining capacity.

According to Business Insider, about 600,000 barrels of Russia’s daily oil-refining capacity had been affected by Ukrainian drone strikes.

JPMorgan Chase & Co estimated that the strikes knocked out about 900,000 barrels a day of oil refining capacity in Russia.

However much oil has been taken off the market, it has proven two things: oil refineries are vulnerable and drone attacks are efficient.  This means you can expect more of them.

Putting the Fun in Fungible

Oil is a fungible asset.  In other words oil trades at about the same price globally.  Russian oil, since the embargo started a few years ago, has been finding its way to India and China.  Those countries will now have to make up that volume by buying from the U.S. or the Middle East.  This will push up the price of crude oil as well as refined products.

Which is also why oil refinery stocks are hitting all-time highs.  In the U.S. the publicly traded oil companies are Valaro (VLO), Phillips 66 (PSX) and Marathon Petroleum (PC).

They have all had a good year and are up between 30 and 65 percent.  The WTI crude price has climbed off its low this year below $70 a barrel and is in a solid uptrend as it climbs past $81 toward its 52-week high of $95.

The International Energy Agency (IEA)  has also revised its forecast for higher oil demand and has predicted a slight supply deficit through 2024.

In its monthly report, the IEA raised its estimate for crude oil demand growth in 2024 by 110,000 barrels per day to 1.3 million, citing a stronger outlook for the U.S. market and increased fuel demand in shipping due to longer routes taken to avoid Red Sea conflicts. 

Furthermore, gasoline prices are up past $3.50 nationally.  The difference between what refineries pay for crude oil and what they can sell distillate for is called the crack spread.  When this is wide and going wider, like it is now, refineries make more money and their share price goes up.

These stocks may continue to increase as more geo-political problems inhibit trade.  Moreover,  the domestic refinery utilization rate has remained below 87% for eight consecutive weeks, marking the longest period of such low utilization in three years.  Which suggests that they can make even more money once they get cracking.

Full disclosure: I own Valero.  It has a pe of 7 and a 2.56% dividend yield.  PSX has a pe of 10 and a 2.65% yield.  MPC has a pe of 8 and a 1.67% dividend yield.

I expect these share prices to continue to go up through April as gasoline prices head towards $4 a gallon due to the annual spring maintenance season coupled with the summer driving season.

All the best,

Christian DeHaemer
Pro Trader Today