Morgan Stanley Sees More Fuel for Valero’s (VLO) Rally

Valero Energy Corporation (NYSE:VLO) has been on a strong rally, posting gains of over 140% since the beginning of 2026. The strong performance is fuelled 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.

While there are now investor concerns that the stock may have topped out, Wall Street sees further upside ahead. On September 14, Morgan Stanley analyst Joe Laetsch significantly boosted the firm's price target on VLO from $255 to $411, while maintaining an 'Equal Weight' rating on the shares. The revised target implies an upside of almost 4% from the current levels and even exceeds the stock's all-time high of just under $400 per share.

Riding the Refining Boom:

The higher price objective is supported by the possibility that Valero can translate the favorable refining environment into material earnings and cash flows. The company did exactly that in the second quarter, when it posted its highest-ever Q2 profit and topped Wall Street expectations.

It seems like the high-margin environment is here to stay following a fresh wave of attacks between the US and Iran. Even if the attacks stop and a potential peace agreement is achieved, the damaged or idled refineries in the Middle East are likely to take some time to return to full operations, keeping refined-fuel markets relatively tight. Notably, the supply disruptions also extend beyond the troubled region, as a recent series of Ukrainian strikes on Russian refineries has further constrained global refining capacity.

Valero's FCC Unit optimization project ​at its St. Charles Refinery will allow it to capitalize even further on the high-priced environment. Expected to be completed in the third quarter, the $230 million initiative will help enhance the facility's ability to produce high-value ​products.

Valero's high shareholder returns also add to its appeal. The company utilized the high profits to return $2.6 billion to shareholders in the second quarter, up significantly from the $695 million in the same period last year. According to TD Cowen's Jason Gabelman, the American refiner is expected to repurchase about 20% of its market value between Q3 and the end of next year, providing a potential boost to its per-share earnings.

The Refining Windfall May Not Last:

The primary concern for Valero is that its unusually high Q2 profits were a result of extraordinary market conditions, much of which may already be reflected in the stock's valuation. Therefore, even a modest decline in global refining margins could lead to a sharp pullback in its share price. Additionally, Valero's aggressive shareholder return strategy may also become unsustainable if crack spreads normalize.