The Energy Stocks Riding A 72% Surge

As I write this (a week before publication), stocks have been falling as crude oil and the 10-year Treasury yield ratchet higher. Let’s take a look at what is going on in the markets.

As I write this, WTI crude oil is at $103 per barrel, up from $70 on July 1. Continued disruptions to oil transport and ongoing attacks are restricting the world’s oil supply, and those shortages are taking hold.    

The 10-year Treasury yield is now above 5.0%. That level gets a lot of investors nervous. The yield was under 4.0% at the end of February.

I learned an interesting point last week when Howard Chan, CEO of Kurv ETFs, joined us for a subscriber webinar. Howard noted an 80% correlation between oil prices and the 10-year yield. That is a surprising correlation, considering that the two values don’t seem to have any causal relationship.

It suggests that as long as crude prices remain high, the Fed won’t be able to do much about long-term interest rates. It also indicates that when the energy sector returns to more normal supply-and-demand levels, interest rates should come down as oil prices decline.

Which brings us to jet fuel—actually, to all fuels referred to as distillates, including      diesel, kerosene, and jet fuel. I like the idea that a barrel of oil is worthless until it gets to a refinery. Refined products are used for heating, power generation, and transportation.

The current energy situation has distillate prices extremely elevated. Besides the fact of higher crude prices, the Ukraine attacks on Russian refining capacity have forced Russia to cease fuel exports. So, diesel and jet fuel prices are at extremely high levels. These two fuels power the transportation of almost everything we buy and where we travel. And now, there is a distinct possibility of actual shortages occurring in some parts of the world.      

I expected great results from refining stocks when they reported second-quarter results. And they did report excellent results. I wasn’t sure profit levels would continue into the third quarter, but they have, and I expect refining margins to remain elevated through the end of the year.

I also expect refining stocks to continue higher. Which is amazing, because the VanEck Oil Refiners ETF (CRAK) is up 72% year to date.

While CRAK is one way to invest in the refining sector, I prefer the three big pure-play U.S. refiners. These three are also CRAK’s top holdings:

• Marathon Petroleum Corp. (MPC)

• Valero Energy Corp. (VLO)

• Phillips 66 (PSX)

Two of the three are recommended holdings in my Velocity Report portfolio.