By Avi Salzman

The war in Ukraine is at a stalemate, and peace talks are going nowhere. But Ukraine has found a new way to disrupt Russia's economy: Destroy its oil refineries in drone attacks. The strategy is having a big impact on global oil markets.

The attacks haven't helped crude oil prices much -- they remain down about 8% for the year, and shares of most oil producers have risen by single-digit percentages, at most. Instead, they have affected markets for oil products like gasoline and diesel, which have become more expensive than analysts had expected.

Refiners such as Valero Energy and Marathon Petroleum, which make those products and profit from the price spread between crude oil and fuels, have benefited. In the past month, Valero is up 17% and Marathon Petroleum has risen 13%. Smaller player PBF Energy is up 27%. There's reason to believe that refining stocks can keep rising.

Earlier this year, President Donald Trump committed to trying to end the war in Ukraine. But this past Tuesday, Trump changed his tune, predicting that Ukraine can win back all of its territory. "Putin and Russia are in BIG Economic trouble, and this is the time for Ukraine to act," he wrote on Truth Social.

With Russia showing few signs of slowing its attacks, and the global community still debating more sanctions, Ukraine is trying new tactics. The Ukrainian military has stepped up attacks on refineries in Russia since the early summer, sending hundreds of drones into Russian territory to blast the country's infrastructure. "The most effective sanctions -- the sanctions that act the fastest -- are the fires at Russian oil refineries, their terminals, and oil depots," said Ukrainian President Volodymyr Zelensky in an address to his country.

Individually, Ukraine's attacks have had mixed success, but collectively they have knocked out enough capacity to affect gasoline and diesel prices around the world. The blasts have hit at least 1.5 million barrels worth of Russian oil refining capacity, according to TD Cowen analyst Jason Gabelman, some 30% of the country's total capacity.

This month, Russia's exports of oil products such as diesel and gasoline have been down by about 300,000 barrels a day versus the same period last year. Total global refining capacity is over 100 million barrels, but small changes in supply can have a big effect. Commodities often trade based on shifts in the availability of a marginal barrel.

Refiners outside of Russia are running full steam ahead, at a time of year when they often slow down operations because people drive less in the fall than they do in the summer. The attacks on Russia have created more incentives to ramp up. One measure of refining margins that takes into account both gasoline and diesel is up 34% year over year, according to Jefferies. Refiners have been using 94% of their capacity over the past four weeks, versus 92% last year.

Some analysts say they expect the Ukrainian attacks to continue boosting refiners, changing expectations for third-quarter earnings.

"Before these attacks happened, we had expected the market to soften a bit -- and it started to do so," Gabelman says. "But these attacks create a level of uncertainty that's difficult to account for. That's why it's difficult to bet against the group right now."

Gabelman likes Marathon Petroleum because the company has been particularly good at taking advantage of high margins to increase its cash flow. Analysts see the company's earnings per share jumping 41% next year. Shares trade at just 14 times its expected 2026 earnings, well below the broader market.

UBS also cited the Ukrainian drone attacks as a reason to buy a refiner. UBS analyst Manav Gupta boosted his earnings estimates for Valero and increased his price target to $183 from $165. Shares were recently trading at $172.

Write to Avi Salzman at avi.salzman@barrons.com

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September 26, 2025 08:50 ET (12:50 GMT)

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