Oppenheimer analysts have upgraded the energy sector (XLE) to "tactically attractive" following crude oil's rebound from its $68 support level on March 2, according to Oppenheimer reports. The strategists noted that while the commodity itself remains range-bound, the relative strength of energy stocks has improved significantly. This upgrade comes as the US-Iran war continues to disrupt global oil flows, with attacks between the US and Iran again throttling Gulf crude exports through the Strait of Hormuz, where a fifth of the world's oil previously passed before the conflict. The escalating tensions have forced more than 3 million barrels per day of Saudi crude that were going to Asia through the Bab el-Mandeb waterway to take much longer routes, with three tankers carrying Saudi crude bound for China and India making U-turns on Tuesday, heading towards the Suez Canal.
Despite the war-related disruptions, refiners are experiencing unprecedented profitability with Asian refiners' margins jumping to more than $65 a barrel for gasoil and jet fuel, up from just above $20 before the war. As per Reuters, global refiners had been expected to run 81.6 million barrels per day in the third quarter, up more than 4% from the second quarter, but still 4% lower than a year earlier. In Asia, consultancy Wood Mackenzie expected throughput to reach 30.37 million bpd in August, rebounding from about 28 million bpd in May and June. However, that recovery could face significant challenges as Kpler analyst Sumit Ritolia reports that refineries in Asia excluding China are running at 93% to 95% of pre-war levels, while China's refinery runs slumped to just 58% of capacity in June. A Chinese refining executive said he expects some delays for July-August loading cargoes which will make it hard to raise output.
Raymond James analyst Justin Jenkins, who maintains an 80% success rate, has reiterated Buy ratings on three mid-cap refiners positioned to benefit from record-high margins. According to reports from BeInCrypto, these recommendations come as US oil refiners experience unprecedented profitability, with the crack spread hitting a record near $59 per barrel in July, nearly triple where it started the year. The analyst's picks include Delek US Holdings, HF Sinclair, and Par Pacific Holdings, all of which are refiners rather than major oil companies. As Reuters reports, US and European refiners are expected to maximise third quarter output to capitalise on record margins but have little room to ramp up, while Chinese refiners have the most room to ramp up output and are less dependent on imported crude due to large stockpiles. Energy Aspects analyst Raul Calzada confirms that refiners are running at record utilisation rates, with US Gulf Coast runs forecast to rise by 200,000 bpd, up 2.1% from a year earlier.
China could play a crucial role in filling the fuel supply gap as Asian refiners face delays. According to Reuters, China's refinery runs slumped to just 58% of capacity in June, but it has the most room to ramp up output and is less dependent than other countries on imported crude. Wood Mackenzie sees China's throughput climbing to 13.96 million bpd in August, up from 12.63 million bpd in June. China's independent refiners, which have bought discounted Middle Eastern crude, are expected to raise output, with Shenghong Petrochemical's 320,000-bpd refinery in Jiangsu province expected to resume operations in mid-August after a major overhaul. However, analysts warn that record margins may already be priced in, with some strategists cautioning that refiners have run too far, too fast. Beijing eased export restrictions for July, but it remains unclear whether the policy will extend into August, as China's refiners have kept a lid on output due to weak domestic demand and fuel export restrictions.
Delek US Holdings has delivered exceptional returns with approximately 127% gains this year, while Par Pacific Holdings leads with approximately 129% gains, benefiting from its niche markets. As reported by BeInCrypto, Jenkins set a $70 price target on Delek and raised his target to $85 on Par Pacific. European diesel profit margins hit a record of $66.25 a barrel after Russia banned diesel exports, while European refiners are expected to maximise third quarter output. However, technical analysis shows mixed signals, with HF Sinclair's $95 target implying only about 4% upside from recent levels near $92, while the stock's Chaikin Money Flow peaked in early May suggesting institutional buying momentum may be fading. Trey Hamblet, analyst at refinery tracker Industrial Info Resources, noted that "in the past couple of months, we have witnessed several refiners marginally increase rates beyond their normal operating where possible," but refiners are not incentivised to maximise gasoline production as they need to make as much diesel as possible because that's where the margin is.
