This was a historic event for refiners. marathon, Valeroand HF Sinclair WTI 3-2-1 crack margins nearly tripled from January to nearly $59 per barrel, each up more than 80% in 2026 versus an 11% rise for the S&P 500 Index.
MPC and VLO have nearly doubled year-to-date, and PSX is up 66%, with about a third of that gain occurring in one month. The same spread averaged about $19 from 2010 to 2021.
How rare is this move?
The S&P 500 oil and gas refining and marketing subindustry group, which includes Marathon, Valero Energy and Phillips 66, has soared 104% this year, according to Carter Wirth, a friend of Wirthcharting. As of Friday’s close, the index was 41% above its 150-day moving average, Wirth’s favorite indicator. This has only happened five times in the history of the index. All five had negative six-month returns, with an average return of -10.1%.
If you’re still tempted to jump, understand that the margin factor here is geopolitical, and the geopolitical premium is reversible. The explosion in the widening of the rift resulted from hostilities between Russia and Ukraine, as well as hostilities in the Strait of Hormuz. The strait has recently received more attention, as Russia is a significant producer of refined products under normal circumstances, perhaps 5.5 millibarrels per day, but its production has fallen by 25-30% by some estimates.
If a ceasefire in the Gulf were to actually occur, the extent of the rift would be greatly reduced and refiners would be drawn into it. As I write this, the Nymex 3:2:1 spread is around $69.92 in September (up from less than $20 in early January) and $44.38 in August 2027, more than 35% lower. The average price from February 2016 to February 2026 (just before the Iran attack) was $21.68.
Marathon Oil since the beginning of the year
Cyclical (or mean-reverting) businesses look the cheapest as record profits lower P/E ratios. Otherwise, the market will pay multiples as if the abnormally high margins would continue indefinitely, which they do not. As a result, over the past decade (excluding the pandemic period), refiners like Phillips and Marathon Petroleum have ranged from mid-single digit P/E ratios to between 35 and 40 times.
It is often said that the best treatments are expensive, but their effects tend to be slow. Demand destruction is real, but behavior change can take time, and supply-side production will not normalize overnight. If the product market remains short-lived, the mid-cycle crack could really reset higher. In other words, today’s stock price is not as peak-like as it seems, and if Holmes continues to be hot until the end of the year, the “extension” will be further extended.
Refining is a great business, but if you’ve had any luck with this trade this year, it’s likely time to take profits, and those bold enough looking for some kind of nasty reversal by the end of the year may take a bearish bet, perhaps using options, to take a position that normalizes if there are headlines of easing.
We chose Marathon Petroleum here, but honestly, the theory is the same for all large refiners, so if you hold a position in any of the other refiners, a similar structure should apply there as well.
