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

Valero Energy (VLO) has experienced a remarkable rally, surging over 140% since the start of 2026. This impressive performance is driven by a sharp increase in global refining margins, caused by disruptions in the industry that have reduced refining capacity and tightened supplies of gasoline, diesel, and jet fuel. Despite concerns about the stock potentially reaching its peak, analysts on Wall Street anticipate further upside.

Morgan Stanley's Joe Laetsch recently increased the price target for VLO from $255 to $411, maintaining an Equal Weight rating and implying almost a 4% upside from current levels. This target is backed by the potential for Valero to leverage the favorable refining environment into significant earnings and cash flows. The company has already demonstrated this in Q2, posting its highest-ever profit and surpassing Wall Street expectations.

The favorable market conditions are expected to continue due to recent attacks between the US and Iran, which have damaged or idled refineries in the Middle East. These disruptions are likely to keep refined-fuel markets tight for some time, even if a peace agreement is reached. Valero's recent FCC Unit optimization project at its St. Charles Refinery, which is expected to be completed in Q3, will further capitalize on the high-margin environment by enhancing the facility's ability to produce high-value products.

The company has also returned $2.6 billion to shareholders in the second quarter, a significant increase from $695 million in the same period last year. While the high Q2 profits were a result of extraordinary market conditions, they may already be reflected in the stock's valuation. If global refining margins decline, Valero's share price may experience a sharp pullback.

Additionally, the aggressive shareholder return strategy could become unsustainable if crack spreads normalize. Morgan Stanley's decision to raise its price target for Valero indicates confidence in the tight refining margins sustaining elevated earnings, but a normalization of these margins could lead to disappointment for the stock.

Valero is held by 81 hedge funds in the Insider Monkey database, with a total investment value of $2.85 billion, up from 67 hedge fund investors with a cumulative stake value of $2.43 billion in the previous quarter. While the potential for VLO as an investment is acknowledged, certain AI stocks are believed to offer greater upside potential and lower downside risk.