American refiners are minting money as the margin they earn turning crude into fuel has surged to a record high, driven by hostilities in the Strait of Hormuz and a structural decline in U.S. refining capacity. Marathon Petroleum Corp., Valero Energy Corp., and Phillips 66 rank among the best-performing names in the S&P 500 this month, with gains of approximately 24%, 23%, and 20% respectively. The VanEck Oil Refiners ETF (CRAK) has climbed 18.3% in July, putting it on track for its best month since November 2020.

Record Refining Margins Drive Gains

The engine behind the refiner rally is the 3-2-1 crack spread, which measures the profit from turning three barrels of crude into two barrels of gasoline and one of diesel. Matthew Sigel, head of digital assets research at VanEck, stated that the spread "just hit an all-time high of ~$70/bbl, eclipsing the 2022 energy crisis." This surge is attributed to the blockade of the Strait of Hormuz, which has tightened global fuel supplies faster than crude, allowing refiners to capitalize on the widening gap.

Structural Capacity Constraints

Beyond geopolitical risks, a deeper reason for the squeeze is the permanent retirement of U.S. refining capacity. Sigel noted that the country has retired between 1.2 and 1.3 million barrels a day of capacity since 2019, equivalent to closing seven major plants. This reduction leaves far less room to absorb disruptions, amplifying the impact on margins.

Impact on Consumers and Analyst Views

The same forces lifting refiner profits are reaching the pump. AAA reported the national average for regular gasoline at $4.00 a gallon, up from $3.87 a week earlier, while diesel sits at $5.11. Despite the rally, Wall Street consensus price targets suggest the stocks are overvalued. Analyst consensus for Marathon Petroleum sits at $255 against a recent price of $315, while Valero Energy's consensus is $239 versus $311. Raymond James recently lifted targets to Street-highs of $335 for Marathon and $340 for Valero.

Former Petronas trader Baron Lamarre warns that a temporary crude surplus makes exchange-traded funds like United States Oil Fund, LP (USO) and United States Brent Oil Fund, LP (BNO) poor investment choices despite historic refining margins and 10% of global capacity sitting offline. Lamarre, co-founder of the International Digital Exchange (INDEX), suggests targeting individual refiners to safely capture the product shortage rather than relying on broad commodity funds.

Disconnect Between Crude and Crack Spreads

The U.S. 3-2-1 crack spread recently hit a record $64 per barrel with approximately 8 million barrels per day offline. However, raw crude prices have failed to match this downstream boom. A crack spread represents the gross profit margin an oil refinery earns by breaking down crude oil into refined petroleum products like gasoline and diesel.

Lamarre attributes this divergence to a fundamental market structure. "This looks more like a temporary crude surplus running into a genuinely separate product shortage, rather than tight refining capacity dragging crude prices up with it," he said. Consequently, he cautions against using broad commodity funds to trade the refining crunch, specifically advising against leaning on the refining story as a support factor for USO or BNO.

The Case for Individual Refiners

Louis Navellier, founder of Navellier & Associates, explicitly advises traders to prefer individual stocks like Phillips 66 (PSX) and HF Sinclair Corp. (DINO). Lamarre echoes this sentiment, noting that record margins provide a much cleaner tailwind for refiners compared to crude trackers.

Furthermore, Lamarre and Bitunix analyst Dean Chen warn that futures-based ETFs face contango risks. These risks can "quietly eat into returns" through "negative roll costs." Lamarre emphasizes that USO and BNO are "tactical vehicles right now, not buy-and-forget."

Crude Price Scenarios

Lamarre outlines four potential scenarios for crude prices, emphasizing a wide-band outlook over tight forecasts:

Navellier maintains that any war-related spikes will be "temporary," projecting WTI to peak "up to $82 per barrel" through Labor Day.

Market Performance

At the last check, Crude Oil WTI Futures were down 0.61% at $81.28, and Brent Oil Futures were 0.05% lower at $88.06. USO closed 3.91% higher on Friday and was down 0.25% in the premarket on Monday. BNO closed 4.10% higher at $48.70 and was 0.11% higher in the premarket on Monday.