Two weeks ago, the U.S. and Iran agreed to reopen the Strait of Hormuz...
As a result, oil prices fell and energy stocks sold off. Investors who had bought in during the Iran war started to shift their money out.
To all appearances, the energy trade was over.
But while investors were rotating out, something else was already in motion...
On June 16, drones hit the Gazprom Neft refinery in Moscow – the main fuel source for the entire Moscow region. A unit that handles 53% of the plant's output took a direct hit and shut down. Two days later, several drones hit the same refinery again.
Typically, Russia has a surplus of diesel and will export around 40% of its supply. In fact, last year, Russia supplied about 11% of the world's diesel.
But Ukraine is increasingly targeting Russian energy hubs. These refineries produce around 25% of Russia's diesel output. With lines at Russian gas stations growing longer, the government is getting ready to step in...
On June 23, Russia's Deputy Prime Minister Alexander Novak met with President Vladimir Putin. They talked about imposing a complete ban on diesel exports.
A full export ban would not stop in Eastern Europe... It would hit Africa and parts of Asia that still buy Russian fuel. Then it would push up global diesel prices.
This is the energy story the Hormuz rally buried. Yes, crude prices fell when the strait reopened. But diesel is a separate market.
And there is at least one company set up to gain from tighter diesel supply...
Where the Opportunity Hides
Marathon Petroleum (MPC) is the largest oil refiner in the U.S. To be clear, the company doesn't drill for crude. It buys crude, refines it, and sells the fuel.
When diesel supply gets tight and prices rise, Marathon earns more on every barrel it sells. Margin gains like this can add up quickly.
We can see this in Marathon's first-quarter earnings earlier this year...
Earnings per share came in at $1.65 – more than twice what Wall Street had forecast. Refining margins grew 33% year over year to $17.74 per barrel. Net income flipped from a $74 million loss to a $511 million gain.
That was just from the first quarter of this year... before the Russian diesel story took hold. For the current quarter, Wall Street now projects a massive jump in Marathon's earnings per share to around $12. This is up roughly 206% from a year ago.
Right now, Marathon's stock is sitting around $256. Analysts project that it could jump as much as 35% in the next year.
The Power Gauge gives Marathon a "very bullish" rating. Take a look at its checklist...
As you might expect from the recent strong earnings, Marathon earns a perfect 3 out of 3 on the strength checklist. And while our system sees a bit of weakness in timing right now, even that is starting to look up again.
Year to date, MPC is up about 55%. This crushes the S&P 500 Index's roughly 9% gain over the same period.
The Iranian deal calmed the market. But diesel doesn't come from just one place.
Russia is the world's second-largest diesel exporter. Right now, at least a quarter of its oil plants are off line. And a complete export ban is on the table.
Many investors are moving away from energy... But the Power Gauge still sees an opportunity in this sector.
Good investing,
John Evelius
