The US refining stocks have been on a strong rally this year, driven by an unusually sharp surge in global refining margins as the ongoing disruptions have significantly reduced the world’s refining capacity and tightened supplies of gasoline, diesel, and jet fuel. Valero Energy Corporation (NYSE:VLO) has posted YTD gains of over 123%, while Phillips 66 (NYSE:PSX) has also almost doubled in value since the beginning of the year.
With both American refining giants having significantly outperformed the broader market, there are now investor concerns that they may have topped out. However, Wells Fargo seems to disagree.
On September 1, the firm raised its price target on VLO from $356 to $389 and on PSX from $239 to $335, while reaffirming an ‘Overweight’ rating on both shares. The revised targets indicate an upside of more than 30% for Phillips 66 and over 5% for Valero, signaling that the bank sees the current refining upcycle to last longer.
The bullish outlook reflects Wells Fargo’s more constructive view of the refining environment and follows a decision by the EPA to grant 1.76 billion renewable fuel-credit exemptions to small refineries for the 2025 compliance year. Notably, this is the largest volume of exemptions from mandates requiring the blending of renewable fuels since 2017 and roughly double the amount the agency estimated earlier this year.
A More Favorable Policy Backdrop:
The larger-than-expected exemptions make the development more significant than a routine regulatory adjustment, and suggest that the broader policy environment in Washington may be turning increasingly favorable towards refiners.
The current geopolitical situation also remains supportive. The renewed attacks between Iran and the US mean that the region’s refined-product supply could remain constrained for longer. This will allow the US refiners to continue capitalizing on the high refining margins and generate cash well above historic levels.
The environment directly benefits Phillips 66 and Valero as both companies possess large refining systems capable of processing substantial volumes when margins are attractive.
The EPA Decision Could Backfire on Big Refiners:
It needs mentioning that while the EPA’s decision is generally positive for refiners that receive exemptions, none of the refineries owned by Phillips 66 and Valero have been reported to have qualified. This means that the companies are not primary beneficiaries of the small-refinery exemptions.
Additionally, the EPA’s decision itself also carries a significant downside for both refiners. The agency has clearly indicated that it is considering reallocating the waived obligations to larger refiners in 2026 and 2027, meaning that VLO and PSX could face higher RFS compliance obligations in the future.
Lastly, it is important to keep in mind that the unusually high profits recently posted by both refiners were a result of extraordinary market conditions, and crack spread could normalize quickly if the global refined product supplies recover. Therefore, even a modest decline in refining margins could trigger a significant pullback in valuation.
Conclusion:
Overall, Wells Fargo’s raised price targets for Valero Energy and Phillips 66 reinforce the bullish case surrounding them and suggest that the refining upcycle may still have some momentum left. However, neither companies directly benefit from the EPA exemptions, while potential future RFS obligations and margin normalization remain key risks after their strong rallies.
Market Sentiment:
Valero Energy Corporation was held by 81 hedge funds with a cumulative investment value of $2.85 billion at the end of Q2 2026 in the Insider Monkey database. This compares to 69 hedge fund investors boasting a total stake value of over $5.63 billion for Phillips 66 (NYSE:PSX).
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This article is originally published at Insider Monkey.
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