Federal Backing Propels US Refiners Toward Record Profits Amid War-Era Margins
Contributed Opinion

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President Biden recently invoked Section 303 of the Defense Production Act of 1950, a law granting the president emergency industrial powers, to bolster domestic oil production, refining, and distribution. The official reason given was to safeguard the petroleum infrastructure vital to U.S. military readiness, without which our defense capabilities would be "severely impaired."

However, a deeper examination reveals another likely motivation. As average U.S. gas prices soared to $4.30/gallon and diesel topped $5.80/gallon last week, the administration likely sought to address voter discontent over high fuel costs, which can swiftly sway elections. The order empowers the Energy Secretary to expand refining capacity by streamlining regulations, fast-tracking projects, and authorizing federal financial aid, effectively prioritizing refining as a national security imperative.

This development is perfectly timed for U.S. refiners. With spring maintenance season concluding and summer driving demand starting, refiners were already poised for strong performance. Additionally, global demand for U.S. Gulf Coast crude and refined products is surging due to the ongoing dual blockades in the Strait of Hormuz. Refiners are also benefiting from robust crack spreads - the difference between crude costs and refined product prices.

Major refiners like Exxon Mobil Corp. (XOM:NYSE), Marathon Petroleum Corp. (MPC:NYSE), and Valero Energy Corp. (VLO:NYSE) have completed turnarounds at their Gulf Coast facilities and are ramping back up just as demand is set to spike. The supply crisis stemming from the Strait of Hormuz blockades is beginning to materialize as tankers that delivered cargoes before the war are now unable to reload. Europe and Asia are scrambling for diesel and gasoline, and Gulf Coast refiners are uniquely positioned to meet this demand.

In April, Gulf Coast 3-2-1 crack spreads averaged a lucrative $41.75/barrel, nearly double year-ago levels. Diesel margins are especially high, with prices averaging $61.42/barrel, up 164% year-over-year. These are war-era margins that will likely persist given the structurally tight global diesel supply, exacerbated by the ongoing Strait of Hormuz closure.

Invoking the Defense Production Act turbocharges this setup by giving refiners federal backing to maximize output. It enables expedited permitting for capacity expansion projects and pledges federal purchases and financial commitments. The order's language underscores refining as essential to national defense, with inadequate capacity framed as a severe threat.

The real investment opportunity lies not with the integrated oil majors like Exxon, but with the independent refiners trading at valuations that don't reflect their imminent margin windfall. Valero Energy, the second-largest U.S. refiner, Marathon Petroleum, the largest by volume, and Phillips 66 (PSX:NYSE) are all trading at remarkably low valuations relative to their earnings power in the current environment.

The market has yet to fully price in the convergence of factors - the Defense Production Act invocation, the onset of summer driving season, and the surge of global export demand - that will propel these refiners to record profitability. Discerning investors have a chance to capitalize on this overlooked opportunity.