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What the Oil Market Disruption Means for US Refiners
As the oil market adjusts to Middle East disruptions, US refiners are capturing near-term benefits with longer-term risks intact.
Key Takeaways
- The conflict in the Middle East abruptly tightened global oil and product supply, driving a sharp rise in refining margins led by diesel.
- Refiner stocks have surged on stronger earnings expectations, but valuations now assume elevated margins last longer than mid-cycle history suggests.
- Near-term fundamentals favor US refiners, though rising fuel prices increase the risk of demand destruction if conditions worsen.
A Strong Start to 2026, Then the Market Changed Overnight
US refiners wrapped up 2025 on a high note, delivering their strongest quarterly results of the year in the fourth quarter. The setup for 2026 was looking favorable as well, with global refining outages further constraining already tight supply. Through the first two months of the year, that outlook was largely playing out.
That changed on February 28.
US military action against Iran—and subsequent attacks and disruptions to key energy infrastructure in the Persian Gulf—dramatically altered the oil market landscape. Those attacks have led to the closure of the Strait of Hormuz and the flow of 8 million to 10 million barrels of crude oil per day and 6 million barrels per day of refined products.
Valuations get more stretched, assuming an eventual return to mid-cycle
Refiners were already up over 18% on average through Feb. 27, reflecting confidence in a strong earnings year. After the war began, shares surged further, leaving the group up roughly 44% by late March. Even after accounting for the latest rise in near-term margins, we still largely see the group as overvalued.
We don’t dispute the notion of a very strong earnings year for the group, with the potential to set new records. However, our valuations remain anchored to a long-term reversion to mid-cycle levels, and we’ve seen little, yet, to dissuade us from the view that mid-cycle remains unchanged.
Valuations at a Glance
Shares soar, but so do earnings expectations
As with the fourth quarter of 2025, share prices have risen on improving earnings expectations, leaving forward multiples at reasonable levels. In fact, current earnings expectations may be too low if the war continues and the market assumes higher margins for longer. While we have incorporated higher margins through 2028 into our fair values, we still assume a return to mid-cycle levels within our forecast period. As a result, we view most refiners as overvalued.
Market Conditions
Margins soaring as outlook rests on events in Iran, with typical indicators offering little insight.
Diesel is doing the heavy lifting
Diesel margins have soared in the wake of the Iran war. Middle East refiners’ inability to export has exacerbated a market already supply-constrained by refinery outages, particularly in Russia.
Concerns are also mounting about the availability of sour heavy crude, a key input for diesel production. If Asian refiners struggle to source enough crude, utilization rates could fall, tightening product supply further.
Gasoline does not suffer from the same issues and has seen margins rise more modestly so far.
Demand supportive of strong margins, but that could change
For now, US product demand remains supportive. But retail fuel prices have climbed quickly. Since late January, average US gasoline and diesel prices are up 40% and 50%, respectively. The nationwide average price for gasoline is approaching $4/gallon and is already over $5/gallon for diesel, with prices much higher on the West Coast.
The risk for refiners is that these prices take a toll on demand. In a worst-case scenario, prices continue to rise and tip the US, and perhaps the global economy, into recession, creating severe demand destruction.
Refiners are running hard to capture strong margins
Even before the latest margin spike, US refiners were operating at relatively high utilization levels. With margins now materially higher, we expect refiners to keep utilization as high as possible, even potentially delaying maintenance.
We do not expect any crude availability issues, given our relatively limited reliance on Persian Gulf crudes, which accounted for about 8% of 2025 imports. That said, crude quality mismatches and price differentials could still affect throughput and profitability.
As long as demand holds up, higher utilization should not negatively impact inventory levels. In fact, the ability to export from the Persian Gulf should create additional export opportunities, particularly for diesel.
Higher European gas prices expand the US advantage
Low natural gas prices are an element of US refiners’ cost advantage, which remains stronger than in the past, given the rise in European prices since Russia’s invasion of Ukraine.
The recent spike in European prices should once again give US refiners a large advantage, albeit not to the levels seen in 2022, assuming a relatively quick resolution to the war. However, Europe’s reliance on LNG imports leaves it vulnerable to weather shocks and global supply disruptions, which could send prices higher. In contrast, US refiners benefit from a stable, low-cost supply of gas, which should consistently give them an advantage that contributes to their moat.
Global supply dynamics favor US refiners, especially in the near term
The closure of the Strait of Hormuz effectively sidelines around 11% of global refining capacity, creating a near-term tailwind for US refiners.
Longer term, the outlook remains favorable. Global capacity additions are slowing, while refinery closures are likely to continue in the next few years, particularly in Europe and North America. Current disruptions to Russian refineries and delays to new refineries in Mexico and Nigeria are benefiting US refiners as well.
Iran War Is Powering Refiner Shares Higher
Valuations are overreaching on the currently strong refining market.
Source: Pitchbook. Data as of March 29, 2026.
Asset values are near cycle highs
Market-implied asset values—measured by adjusted enterprise value per complexity barrel—are trading well above their 2014-19 averages. While these aren’t precise valuation metrics, they provide relative value indicators.
Shares have breached levels reached in April 2024 and are setting new highs in some cases. These levels suggest risk is to the downside, but the longer the war goes on and flows are disrupted, refiners are likely to see strong earnings that justify these valuations in the near term, preventing a pullback.
Margins set to rise, but only modestly
Refining gross margin is determined by various factors—output mix, capture rate, and crude slate—that differ across refiners. Margins in the first quarter of 2026 should exceed both Q4 2025 and Q1 2025, but the improvement will be modest as the impacts of the Iran war didn’t materialize until March 2026.
As such, the rally in shares is projecting much greater improvement during the year and beyond. Current futures curves support this view, but that could change quickly if the war ends and petroleum flows from the Persian Gulf resume.
Even in that case, 2026 still looks set to outperform 2025 and remain above mid-cycle levels.
