US refining stocks are up while E&P stocks are down. Supply and demand explain why.

How crack spreads and refinery closures created an unexpected winner in a down oil market

Oil prices have been falling for over two years now. So why are refining stocks booming?

Valero is an independent US refiner with a $65 billion market capitalization.

This year alone, Valero’s stock price is up 31%. For reference, the S&P 500 is flat.

I decided to create the chart below, showing that Valero’s stock is up nearly 50% since September 2024. The S&P 500 is up 21%, with Marathon and Phillips 66, two other massive independent refiners, on its heels at 20%.

Refining is very much having its day.

And oil producers are not sharing in the fun.

As oil prices have continued to drift downward over the past couple of years, the fortunes of refiners have been going in the opposite direction.

In this post we’ll explore the market dynamics that have emerged in the refining sector, and why these dynamics differ materially from what’s happening on the upstream production side.

From a distance, it’s easy to imagine oil & gas as one large industry exposed to commodity markets in the obvious ways.

We’ll soon see that different segments of the industry can experience vastly different realities at the same time.

And today, the refiners (and their shareholders) are the ones celebrating.

Shareholders are driving refining stocks ahead of their E&P cousins

The chart below shows us the monthly average performance of the S&P Oil & Gas Refining & Marketing Select Industry Index (the “Refiner Index”) and the S&P Oil & Gas Exploration & Production Select Industry Index (the “Producer Index”).

We made September 2024 the baseline, and are looking at the change in these indices since that point in time. The S&P 500 is included for reference.