Energy Security Back in Focus
The prolonged conflict with Iran has had a huge impact on the global energy market. It made clear how important energy and energy security are. Inventories of crude oil and refined products - gasoline, diesel, and jet fuel - have dropped and now need refilling. That has pushed refining margins wide, and those margins are being captured by some refiners but not all.
Refining: The Trade to Watch
Crack spreads (the profit gap between crude and the fuels made from it) hit record highs. Tortoise Capital switched into refiners in February, when Maduro was captured. Venezuela became a source of more heavy oil into the US, which let US refiners widen their margins - and that is exactly what happened. Refined product margins have since widened even more.
Refiners Valero (VLO), Marathon Petroleum (MPC), and Phillips 66 (PSX) have generated a massive amount of free cash flow over the last couple quarters. Much of that cash went back to shareholders through share buybacks and higher dividends.
People expected some demand destruction - a slowdown in fuel demand - but that has not shown up. Valero (VLO) is benefiting from refined product exports on top of the higher crack spreads. The names I like here are Valero (VLO) and Marathon Petroleum (MPC). Both stocks have run hard this year and over the past couple years, but there is still money to be made in the refining trade. Demand for gasoline, diesel, and jet fuel should keep rising even as oil prices climb, because domestic and global economies need these products to keep running.
Is It Too Late to Buy?
You do not need to wait for a pullback. A global economic slowdown or a Middle East truce could change that, and some investors are waiting for a peace deal - a fair position. But neither looks likely soon. If you skipped the energy sector this year, you missed returns and are lagging, and a peace deal is probably still a while off.
LNG: A Large Opportunity
Liquefied natural gas and LNG exports are a significant opportunity. The US is both the largest producer and the largest exporter of natural gas.
One casualty of the war: Qatar, the number two natural gas exporter, has facilities that are down and not operating. Repairs will take a while. That matters because European natural gas inventories are low and Europe needs to refill them - and it will turn to the US. European natural gas prices have risen substantially while US prices have stayed fairly steady.
Venture Global (VG) benefits from that gap, earning more from higher European prices relative to US prices during this period. Both US LNG exporters - Cheniere (LNG) and Venture Global (VG) - are opportunities for investors.
