Despite recurring headlines suggesting the United States and Iran are nearing a peace agreement, negotiations have repeatedly broken down, often abruptly. Today was no exception. The fragile ceasefire has once again come under strain, with Iranian state media reporting that the regime has suspended talks and renewed threats to close the Strait of Hormuz. Officials have also suggested the possibility of opening "other fronts," including disruptions around the Bab el-Mandeb Strait.
Iran now maintains that no meaningful negotiations can occur until Israel fully withdraws from contested areas in Lebanon and Gaza, where several Iranian-backed proxy groups remain active. While the Strait of Hormuz receives most of the attention due to its critical role in global oil shipments, the Bab el-Mandeb Strait is another major trade chokepoint connecting the Red Sea to the Indian Ocean. Any escalation in either region could further disrupt global trade flows, tighten energy markets, and put additional upward pressure on commodity prices.
Image Source: EIA
Since the conflict began, crude oil initially surged before settling into a wide but gradually tightening trading range. Last week, as hopes for a diplomatic resolution improved, oil prices drifted toward the lower end of that range. However, price has rebounded sharply following today’s escalation. Notably, this support area has held multiple times since the conflict started, reinforcing its importance to traders.
As long as crude remains elevated within this range, oil and gas producers should continue to benefit from strong profit margins. A breakout above the current range would provide an additional tailwind, potentially driving earnings expectations and investor sentiment even higher across the sector.
Image Source: TradingView
The Energy Select Sector SPDR ETF ( XLE) has mirrored the commodity's pattern, consolidating in a tightening range of its own. Meanwhile, several industry leaders, including Valero Energy ( VLO), Marathon Petroleum ( MPC) and Phillips 66 ( PSX), continue to exhibit relative strength and carry favorable Zacks Ranks, suggesting the sector may be setting up for another leg higher. We'll take a closer look at each setup below.
Image Source: TradingView
Valero Energy: Estimates Surge as Shares Near Breakout
Valero Energy is one of the world's largest independent petroleum refiners, operating a network of refineries across the United States, Canada, and the United Kingdom. The company benefits from strong refining margins, access to discounted feedstocks, and significant exposure to global demand for gasoline, diesel, and jet fuel.
Analysts have become dramatically more bullish on the company's outlook in recent months. Current year earnings estimates have surged 71% over the last 60 days, while next year's forecasts have climbed 42%, earning the stock a Zacks Rank #1 (Strong Buy) rating. Shares trade at just 9.2x forward earnings, while analysts project long-term EPS growth of 25.6% annually.
Technically, the stock has been consolidating in a tightening range following its recent advance. With earnings estimates moving sharply higher and energy prices remaining elevated, Valero appears to be on the verge of a breakout that could mark the start of another leg higher.
Image Source: TradingView
Marathon Petroleum: Earnings Estimates and Stock Price Gain
Marathon Petroleum is one of the largest downstream energy companies in North America, operating an extensive network of refineries, fuel distribution assets, pipelines, and midstream infrastructure. Through its refining operations and majority ownership stake in MPLX, the company is positioned to benefit from both strong refining margins and steady fee-based energy infrastructure revenue.
Analysts have become even more optimistic on Marathon than Valero. Current year earnings estimates have surged 75% over the last 60 days, while next year's forecasts have jumped 67%, giving the stock a Zacks Rank #1 (Strong Buy). Shares trade at just 8.3x forward earnings, while analysts project long-term EPS growth of 20.8% annually.
The technical setup is equally compelling. Shares have displayed stronger relative strength than many of their peers and are currently consolidating in a tidy high-and-tight bull flag near their recent highs. This pattern often precedes powerful continuation moves, and a breakout above the upper end of the range could signal the start of another leg higher.
Image Source: TradingView
Phillips 66: Another Refiner Stock Showing Strength
Phillips 66 is a diversified energy company with operations spanning refining, midstream infrastructure, chemicals, and fuel marketing. This diversified model provides exposure to strong refining margins while also benefiting from more stable cash flows generated by pipelines, terminals, and other energy infrastructure assets.
Fundamentally, the story continues to improve. Analysts have raised current year earnings estimates by 27% over the last 60 days, while next year's forecasts have climbed 25.5%, supporting a Zacks Rank #1 (Strong Buy) rating. Shares trade at 10x forward earnings, while analysts project long-term EPS growth of 38.5% annually.
Technically, the stock has spent the past several weeks consolidating its prior advance and building a constructive base near recent highs. Combined with improving earnings expectations and a supportive backdrop for energy prices, Phillips 66 appears well-positioned for a potential breakout and continuation of its longer-term uptrend.
Image Source: TradingView
Should Investors Buy Shares in PSX, MPC and VLO?
While headlines remain focused on geopolitics, the real story for investors is the dramatic improvement in earnings expectations across the refining sector. All three companies enjoy Zacks Rank #1 (Strong Buy) ratings, have seen substantial upward earnings revisions, trade at reasonable valuations and are displaying constructive technical patterns.
If crude oil remains elevated or breaks out to new highs, these refiners could continue to benefit from strong margins and rising profit expectations. For investors looking to gain exposure to the energy trade, Valero, Marathon Petroleum, and Phillips 66 appear well-positioned for another leg higher.
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Valero Energy Corporation (VLO): Free Stock Analysis Report
Marathon Petroleum Corporation (MPC): Free Stock Analysis Report
Phillips 66 (PSX): Free Stock Analysis Report
State Street Energy Select Sector SPDR ETF (XLE): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).