From indoor dining to international flights, industries battered by the Covid-19 pandemic are inching back toward normalcy, but perhaps none has turned a corner quite as definitively as the oil-refining sector.

Take PBF Energy Inc., for instance. As virus-wary Americans halted most travel in 2020, curbing everything from cross-country road trips to daily commutes, the New Jersey-based refiner, whose biggest shareholder is billionaire Carlos Slim, was forced to halt motor-fuel production in its home state due to a buildup of fuel but few buyers. Revenues were more than halved at the height of the crisis, and its notes due in 2028 plummeted below 50 cents on the dollar as recently as last summer. Executives put it particularly succinctly on an October 2020 earnings call: In terms of stockpiled gasoline and diesel, there was “too damn much inventory.”

How quickly things change. Following an industry-leading rally in its shares and bonds, the refiner is now planning to resume fuel production at its Paulsboro, New Jersey, refinery, people familiar with operations have said. And when it does, that output is likely to be more profitable than it has been in years, thanks to the highest margins on gasoline for this time of year since 2013. 

Behind that reversal of fortunes is the sheer fact of supply and demand. On the demand side, driving across the U.S.—home to the world’s second largest car fleet—is back near pre-pandemic levels. Supplies, though, have remained largely constrained.

That’s because in addition to any fuelmaking capacity that was idled when demand dried up, such as PBF’s Paulsboro plant, some of the output shuttered by larger companies like Marathon Petroleum Corp., Phillips 66 and Shell Plc won’t be coming back. Refiners closed some of their least profitable crude-processing plants during the pandemic permanently, with some now being converted into smaller renewable-diesel facilities. In total, more than 1 million barrels a day of crude oil refining capacity—or about 5% overall—has shut since the beginning of the pandemic.

As a result, those refineries still operating are enjoying less competition, plus the strongest gasoline prices in more than seven years. The three independent U.S. fuel-making companies reporting results so far this earnings season—Marathon, Valero Energy Corp. and Phillips 66—have all posted results that surpassed Wall Street analysts, with managers pledging to use extra cash from operations to return more capital to shareholders.

U.S. refiners “have not wasted the crisis of the pandemic,” said Alan Gelder, vice president of refining, chemicals and oil markets at Wood Mackenzie, a consulting firm. The streamlining of operations “has improved the quality of their refining stock and, as a result, they have benefited quite strongly from better global fundamentals.”

And it might get even better from here. Marathon, the biggest U.S. refiner, will make more than $15 for every barrel of crude oil distilled into product this year, the most since 2015, according to analyst estimates compiled by Bloomberg. Valero and PBF are also seen posting the best annual refining margins in seven years this year. 

“There will be very little on the supply side to stop” refiners from having a good year and strong recovery, said Robert Campbell, head of oil products at London consultancy Energy Aspects Ltd. Inventories of finished products like gasoline and diesel aren’t back up anywhere near earlier levels, and with many facilities needing to temporarily halt production for maintenance this year, an output surge isn’t in the cards.

There may well be unplanned disruptions, too. Texas winter weather recently took out four refineries in five days with capacities totaling about 1.2 million barrels a day, boosting margins for the wider industry while threatening profits for the owners of those plants.

Other factors are also underpinning the return of the U.S. refining industry, including slightly more production from OPEC+ of the heavier types of oil that coastal refiners such as Valero can typically buy at a discount to lighter, easier-to-process Brent oil. At the same time, skyrocketing prices for natural gas have raised the cost of making fuel in Europe, giving producers in the U.S.—where natural gas is cheaper—a competitive advantage. What’s more, American producers such as PBF and CVR Energy Inc. have largely benefited from a Biden administration decision that eased costly biofuel-blending mandates and gave refiners more time to comply.

To be sure, the industry is still not completely out of the woods. While gasoline and diesel demand has mostly returned to normal, consumption of aviation fuel is still lagging as overseas air travel remains constrained. But even the signs there are getting brighter: U.S. refiners turned about 10% of crude oil into jet fuel at the end of January, the highest share since March 2020, according to data from the Energy Information Administration. That’s a big change from April 2020, when demand for jet fuel was so weak that some producers reprocessed it to make other fuels like diesel.

“While jet fuel remains the one noticeable laggard in the product mix,” Piper Sandler & Co. analyst Ryan Todd wrote in a late January research note, “it has recovered more quickly than most (including ourselves) expected.” At the same time, gasoline and distillate demand have far exceeded expectations, he said. “Turns out that the reports of gasoline’s death have been greatly exaggerated.”