REPORT: Oil Is Near $115 and Gas Is Up $1.20 in a Year. Here's the Refiner Getting Paid.
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| By Al Qureiyeh |
If you have filled your car's tank lately, you are paying more for oil.
Oil is a cost to you at the pump and income to the companies that sell it.
Phillips 66 (PSX), which turns crude oil into gasoline and diesel, reported third quarter adjusted earnings of $14.08 a share on Wednesday.
Oil kept rising, but energy stocks stopped following it higher.
We think the better way to own a company that earns from high oil is a refiner that has already reported.
What Happened
Brent crude, the global oil price, closed Wednesday at about $115 a barrel.
Since the Oct. 21 close, Brent has risen 6.0%.
The Energy Select Sector fund (XLE), which holds big oil companies such as Exxon Mobil and Chevron, rose only 0.4% over those days.
The government's September inflation report, released Oct. 14, showed energy prices up 20.4% from a year earlier.
Thursday's report on the personal consumption expenditures index (PCE) showed prices up 3.6% from a year earlier.
That is the inflation gauge the Federal Reserve (the Fed) prefers, and it matched forecasts.
Early trading showed little change in traders' view of the Fed.
Futures markets, where traders bet on Fed rates, put the chance of a December increase at about eight in ten.
On our scorecard, our Oct. 27 pick Morgan Stanley (MS) is ahead of the S&P 500 by 2.7 points.
We're behind on Ross Stores (ROST), our Wednesday pick, by 1.3 points. We're also behind on the SPDR S&P Insurance fund (KIE) from Monday by 2.7 points.
We're behind on Valero (VLO), our Oct. 14 pick, by 14.2 points.
Why the Skeptics Have a Point
First, the peak. Phillips 66 earned $38.00 on each barrel it refined in the third quarter.
That was well above the second quarter, and the company gave no forecast for the next one.
Second, the Tuesday drop. Phillips 66 fell 7.0% on Oct. 27.
Reports tied it to Iran peace talks and to Russian diesel that may enter the United States.
Trefis found no news from Valero itself, and the cause of the Phillips 66 drop is unconfirmed.
Third, politics. In September the White House said it was weighing limits on diesel exports, which would cut what refiners can sell abroad.
We found nothing since early October that restarts that idea.
We grant all three.
What Weiss Is Saying
Weiss rates Phillips 66 (PSX) B+, a BUY, with Reward rated A+ and Risk rated C+. Reward grades the profit and growth record, and Risk grades how much the price swings.
Chevron (CVX) and Marathon Petroleum (MPC) are also B+, each a BUY, and Exxon Mobil (XOM) is B, a BUY.
Weiss grades were read on Oct. 29.
The Oct. 24 Weiss piece on oil and Treasury yields argues for buying a Treasury note that adjusts for inflation.
We agree that oil is feeding inflation.
Where we read it differently is the action.
Weiss rates the Treasury inflation-protected securities (TIPS) fund TIP D+, a SELL, so we stay with a stock.
The Oct. 28 Weiss piece "Fed Holds Rates: Why the 2-Year Treasury Note Still Beats Your Savings Account" favors short-term Treasurys over a savings account.
We agree that the Fed is on hold for now.
Related story: Oil Tops $112 as Treasury Yields Fall: Why I'd Buy a 5-Year TIPS
What the Crowd May Be Missing
Market commentary was split.
Tikr called 2026 the peak year for oil company profits.
Others, citing SEB, say oil prices still include extra cost because investors fear the war could disrupt supply.
Two things fit the gap for refiners, and we think both are at work.
One is talk of a deal between the United States and Iran, which would send oil lower.
The other is the Russian diesel news, which pushed refiner shares down more than the price of oil.
A deal is the real test. On Wednesday, April 8, Brent fell 13.3% after the ceasefire between the two countries.
If a deal comes, we expect oil stocks to fall, Phillips 66 included.
Looking at Phillips 66 after earlier oil surges:
Phillips 66 beat the market after three of the four earlier surges.
The miss came after the March 31 surge, when the April ceasefire cut oil, so a good start does not protect a buyer.
Bonds have not followed oil.
The 10-year Treasury yield, the interest rate the government pays to borrow for a decade, fell for weeks even as oil rose.
That is why we are not calling a move in bonds, and we are keeping this idea in a stock.
Where the Oil Money Lands
Buy Phillips 66 (PSX), rated B+, a BUY, which closed Wednesday at $273.76, at the next close.
What could work against it: a deal that lowers oil, a return of the diesel export idea, or a price near analysts' targets.
StockAnalysis showed an average target of $280.47, in data dated about Oct. 16 to 20.
That is $6.71 above Wednesday's close.
That is a potential gain of about 2.5%.
MarketBeat's average and Piper Sandler's new target are both below Wednesday's close.
So our case rests on earnings and cash returned, not on the target.
Phillips 66 declared a $1.33 quarterly dividend.
That is a yield of about 1.9% a year at Wednesday's close.
Our time frame is within a year, with first checks at Friday's Chevron and Exxon reports and the Marathon report, expected Nov. 3.
Chevron (CVX), rated B+, a BUY, stays on our watch list because it reports Friday and trades near its average target.
Marathon Petroleum (MPC), rated B+, a BUY, stays on our watch list until its report.
Delta (DAL) and United (UAL), both rated C+, a HOLD, stay on our watch list because a deal would lower their fuel bills.
What We're Watching
First, the Chevron and Exxon reports on Friday. If both report strong profits and their shares still fall, the market is looking past earnings to a possible deal.
We would then recheck Phillips 66.
Second, any word of a deal between the United States and Iran. If one is announced, we expect oil to drop fast, and we would say so the same day.
Third, diesel. If the White House revives limits on diesel exports, Phillips 66 loses a main advantage, and we'd say so.
Fourth, the Nov. 3 elections and the Marathon report. If either changes the oil outlook, we will tell you.
Bottom Line
Oil costs you more at the pump.
Phillips 66 earns more when oil stays high.
Buy Phillips 66 (PSX), rated B+, a BUY, which closed Wednesday at $273.76, at the next close.
Take care,
AL Qureiyeh
