Hormuz Watch: The Refinery Repairs Run Into 2027. So Do the Profit Forecasts.

From the Ships to the Refineries

Part 2 of this series found that tanker booms end when the ships come back. A tanker spike strands ships in queues and on detours, and when the routes reopen, they all return to the market at once.

Refineries do not come back that way. A drone that hits a crude unit or a hydrocracker breaks equipment that takes months to rebuild, and some of this war's damage is not scheduled to be repaired until 2027. That is a large part of why the diesel margin, the gap between the price of diesel and the crude it is made from, stood at about $98 a barrel on Monday. Its 2025 average was $32.

This part follows that margin to the companies that collect it: Valero (VLO), Marathon Petroleum (MPC), Phillips 66 (PSX), PBF Energy (PBF) and HF Sinclair (DINO), five U.S. refiners that include the three largest independents. It covers what they earn, what the market is paying for it, and what could cut the margin short.

The Dashboard

Five of the six readings have new numbers this week. Crude through the strait slipped to 76% of prewar in the week to Saturday, according to Kpler, while Iran stepped up attacks on tankers: UK Maritime Trade Operations counted nine attacks in the strait in the first six days of October. Refined fuel rose to about a third of prewar. The diesel margin eased to $98 from $114 a week earlier, and pump diesel came off its record. The gap between physical Brent and December futures widened to about $25, roughly double a week earlier.

• Crude through Hormuz10.3Mbbl/day76% of prewarWeek to Oct 3, down from 13.5M a week earlier. Vitol’s CEO puts recent flows near 12M.Kpler via WSJ; Vitol via Bloomberg
• Refined fuel through Hormuz1.3Mbbl/dayDown 64%Week to Oct 3, up from 677K a week earlier. Prewar: 3.6M a day.Kpler via WSJ and CNBC
• Brent, now vs. December$126vs. $100Relief priced inPhysical cargoes vs. December futures, both Oct 5. The gap was about $12 a week earlier.EIA daily prices; futures settlement
• Diesel margin$98per bbl3x 2025Oct 5. A week earlier: $114. 2025 average: $32.EIA daily prices; our calculation
• Supertanker day rate$1.22Mper dayNearly 6x prewarGulf to China benchmark, Oct 2. Next weekly report Friday. Late February: $209K.Baltic Exchange; Seatrade
• Pump diesel$6.20per galUp 67%National average, Oct 5, vs. $3.71 a year earlier. Record: $6.53 on Sep 21.EIA weekly retail

Where the Capacity Went

Part 1 compared crude to wheat and diesel to flour. The wheat is arriving again. The mills are the problem.

• The Gulf. In August, Kpler put Middle East refinery runs at about 7.3 million barrels a day, against 9.9 million in February, before the war. Some plants are back: the UAE's Ruwais complex returned to full capacity this summer, and Saudi Arabia restarted Ras Tanura early in the war. Others are not. In June, TotalEnergies chief executive Patrick Pouyanne said the SATORP refinery it owns with Saudi Aramco was running at about 70% after three drone strikes and "probably won't be fully repaired until after this year is over." Bahrain's Sitra refinery ran 100,000 to 120,000 barrels a day in August, against 420,000 before the war, and Kpler does not expect it back to prewar levels until the third quarter of 2027.
• Russia. Ukrainian drones have taken out large parts of Russia's diesel-making capacity. In mid-September, Reuters reported that the Kirishi refinery was completely offline and that Volgograd and NORSI were running at about a quarter of capacity. A drone attack on September 6 idled the Ryazan refinery. Russia's ban on diesel exports by producers runs through October 31.
• China. China's major refiners went into the National Day holiday on October 1 without approval to export fuel in October to markets other than Hong Kong and Macau, Reuters reported. The holiday ends today, and it is not clear whether approvals will follow.
• The United States. U.S. refining capacity was 18.2 million barrels a day on January 1, down more than 250,000 from a year earlier after LyondellBasell closed its Houston refinery and Phillips 66 closed its Los Angeles plant. Valero then idled its 145,000-barrel-a-day Benicia refinery in California earlier this year. U.S. refineries ran at 92.5% of capacity in the week to September 25, and East Coast inventories of diesel and heating oil were 32% below their five-year average in September, according to the EIA.

Add it up and the world is short of refining in a way it is not short of crude. In August, Marathon's chief executive put global refining downtime at more than 9 million barrels a day, "approximately 4 million barrels per day above historical norms." A tanker spike strands ships. A refinery strike breaks the mill.

What a Refiner Keeps

The diesel margin prices one product. A refinery sells a barrel's worth of several. At Valero, about 39% of what its refineries produced in the second quarter was diesel and jet fuel. The rest was gasoline, which earns less, and lower-value products such as asphalt. So each refiner reports its own margin per barrel across everything it makes. In the second quarter, when the diesel margin averaged $63 a barrel, the five booked $23 to $36.

That margin rose 57% to 179% from a year earlier across the five. Profits rose much faster, because a refinery's costs barely move when the margin does. Valero's operating cost was $4.70 a barrel in the second quarter, against $4.91 a year earlier. Its margin after operating costs went from $7.44 a barrel to $18.92, and its profit per share went from $2.28 to $12.54, five and a half times as much. The same math runs in reverse when the margin falls.

The scale is large. Valero processed about 2.95 million barrels a day in the second quarter. At that size, every $1 a barrel of margin, held for a year, is worth about $1.1 billion before tax.

The third quarter is likely to be bigger. The diesel margin averaged $89 in July and August, against $63 in the second quarter, and September's daily prices ran higher still. In July, Valero said the margin environment so far was stronger than in the second quarter. Analysts expect Valero to earn $18.86 a share for the third quarter, half again its second-quarter result. The five report between October 22 and November 3.

What the Market Is Pricing

The stocks have moved far more than the tanker owners'. Through Tuesday, the five were up 109% to 206% this year, and 75% to 133% since the war began. The tanker owners in Part 2 were up 9% to 54% since the war began.

Read the last two columns together. At the end of 2022, after the last diesel shock, the market valued these companies at about two to six years of that year's profit. Today it values them at about four to nine years of this year's expected profit. Per dollar of profit, investors are paying roughly twice what they paid in 2022.

That is not because the profits are smaller. Analysts expect Valero to earn $48.25 a share this year, against $29.26 in 2022. It is because the market expects them to last. In the past 30 days, analysts raised their 2027 estimates for the five by 25% to 53%. They now expect Valero to earn $40.19 a share next year and Marathon $49.60, roughly four times what each earned in 2025.

The 2022 record explains the change. After Russia invaded Ukraine, the diesel margin stayed above $50 a barrel for 11 straight months. Valero earned $29.26 a share in 2022 and $24.71 in 2023. At about four times profit, the market treated 2022 as a short windfall, and it lasted two years. Valero's stock did not peak with the margin. It peaked in April 2024, then fell 33% by the end of that year as profit per share fell by two-thirds, to $8.31.

How Long the Margin Can Last

Here is the comparison the market is making.

This shock is running hotter. August's monthly average, $95, nearly matched the 2022 record set in October of that year, and September ran higher still. The forecasts behind the stock prices assume a long run. In September, the EIA projected the diesel margin would stay above $2 a gallon, about $84 a barrel, through November, then decline steadily through mid-2027. Goldman Sachs expects U.S. diesel margins to reach $63 a barrel in 2027.

The 2022 line also shows what came after. Even in 2023, the margin fell below $30 in only two months, against a 2021 average of $19. It came down, but it did not go back to where it started.

What If a Deal Lands Tomorrow

For refiners, a deal is not the first risk. A deal would reopen routes and lift crude flows, but it would not repair a hydrocracker. The nearer risks are fuel exports coming back and new supply arriving.

• China's decision. If Beijing approves fuel exports after the holiday ends today, Chinese diesel and jet fuel return to Asian markets.
• Russia's deadline. The ban on diesel exports by Russian producers runs through October 31. If it lapses and repairs hold, Russian diesel returns.
• Emergency stocks. The G7's 100-million-barrel release starts with what it called a substantial release of diesel within 20 days, with the rest over four months.
• New refineries. Nigeria's Dangote refinery ran above 700,000 barrels a day in tests in June, more than its design capacity.
• Demand. The EIA expects U.S. retail diesel to average about $4.50 a gallon next year, against $6.29 in September.
• Policy. On Monday, President Trump signed an order allowing red-dyed diesel, normally exempt from fuel taxes and limited to off-road use, on the road, with the federal excise tax deferred. It works through the tax at the pump; it does not cap prices or limit exports. On October 2, he ruled out a diesel export ban: "We're not going to be doing the export ban."

Here is the strongest case that the refiners keep winning anyway.

• The damage outlasts a deal. Some of the repairs run into 2027 whatever happens at the strait.
• The tanks are empty. In July, Valero cited consultant data suggesting that "if the conflict were to end today, global inventories remain below the five-year average range through 2027, with gasoline recovering fastest, followed by diesel and then jet."
• Management sees a long run. Marathon's chief executive said in August: "we expect to remain in an enhanced mid-cycle environment through the end of the year and into 2027."

Our read: the difference from the ships is real. The refiners' windfall rests on broken equipment and empty tanks, not stranded ships, and it is likely to outlast the tanker spike. But the market has already priced a long version: about twice the 2022 multiple, on 2027 forecasts raised by a quarter to a half in a month. That changes the risk from a fast reversal to a slower one, a margin that eases while forecasts are still rising. In the past week, the diesel margin fell from $114 to $98, while the average 2027 estimate for Valero rose from $38.04 to $40.19. The tests come quickly: China's decision this week, Russia's deadline on October 31, the G7's diesel within 20 days, and third-quarter results starting October 22.

What the Wealth Engine Scores Say

Before we get to the verdict, here is what the Wealth Engine Pro platform's systematic scoring shows for all five stocks right now.

All five score Moderate on Company Strength, with Financial Health between 42 and 62 out of 100. Every fair value shown sits above the current price, from 11% for Phillips 66 to 66% for HF Sinclair, and four of the five carry a Bullish outlook. PBF's is Neutral.

In July, The Five's energy spotlight included Valero and HF Sinclair and warned that a fair value computed on record crack spreads "is a photograph of a regime, not a promise." Since then, Valero's fair value has risen from $304.89 to $488.09, and HF Sinclair's from $134.72 to $190.19, because their earnings rose.

These scores are systematic. They evaluate companies based on reported financials, balance sheet quality, moat characteristics, and valuation models (DCF, peer comparison, earnings power). They measure what a company is today, not what it might become. That is by design: the scoring system is built to keep emotion and forward speculation out of the numbers.

This article is doing something different. It is making an editorial argument about how long record margins last and how much of that the stock prices already assume. The scores read the strongest quarters these companies have reported since 2022, so a valuation model will call the stocks cheap until lower margins show up in filings.

Both perspectives are real data. The platform tells you the current fundamentals are mixed and the prices look low against current earnings. The article argues that the market has already paid for a long windfall. Transparent investors use both.

The Bottom Line

The ship owners in Part 2 are collecting a windfall the market expects to end quickly. The refiners are collecting one the market expects to last, because some of the damage behind it will take until 2027 to repair. Both views can be right, and the difference is in the price. The tanker stocks are priced for a short boom. The refiners are priced at about twice their 2022 multiples, on forecasts that rose by a quarter to a half in the past month. They have the stronger case and the higher bar.

Tomorrow: who pays. Truckers, airlines, farmers and households heating with oil, with the pass-through math worked out.