Diesel’s Hundred-Dollar Crack: Why Refinery Outages, Not Crude Supply, Are Driving the Pain at the Pump

Diesel is trading near $180 a barrel while its feedstock, West Texas Intermediate, sits at $85. That roughly $100-a-barrel crack spread, an all-time high, is not a crude story. It is a refining story: Somewhere between 7 and 8 million barrels a day of global refining capacity is offline, and the gap is starting to show up at the pump. Click here to listen to the
full interview.

Refiners Are Pocketing an All-Time-High Margin

Diesel near $180 a barrel against $85 WTI feedstock leaves refiners capturing roughly $100 a barrel, a record crack spread. This is shortage pricing, plain and simple. It is the market’s way of rationing a product that physical capacity can no longer supply at the rate demand requires.

We see this as the clearest signal yet that the diesel market has stopped clearing on price alone and started clearing on availability. Until outages roll off, refiners sit in the driver’s seat, and every incremental barrel of lost capacity pushes that margin wider.

Drones, Not Wells, Are Setting the Diesel Price

Roughly 5 million barrels a day of Russian refining capacity is offline because of Ukrainian strikes. Another 2 million barrels a day is shuttered  in the Middle East due to drone attacks. Russia has compounded the squeeze by halting diesel exports to protect its own domestic supply, and the closure of the Strait of Hormuz has cut some refiners off from the crude they need altogether.

Our base case treats this as a race between Ukrainian drones and Russian repair crews, with no reliable timeline for when the lost capacity returns. U.S. refiners are already running near 96% utilization, and the Department of Energy is working to extend that rate.  But there is little slack left in the system to absorb further shocks, including the hurricane season now getting underway.

Canadian Drivers Will Feel It at the Pump

Product inventories are, in our view, at alarmingly low levels. With little storage cushion left, price becomes the only mechanism available to balance supply and demand. That reduced buffer means Canadian consumers should expect diesel prices to keep climbing rather than plateau, a trend we have  flagged for roughly six months.

Ultimately, the adjustment will  have to come from the demand side. Absent a meaningful return of refining capacity, consumption itself needs to ease before the market can find balance. This is a harder and slower process than simply waiting for a well to come back online.

The Demand Growth Story Has an Asterisk

The IEA is calling for roughly 2 million barrels a day of demand growth next year, but that forecast assumes the Strait of Hormuz reopens and a durable peace holds. With an estimated 7% of global refining capacity offline and crude access constrained in places, we question how demand can grow at that pace when the system cannot even fully convert the crude it has into usable product.

China is the wild card. Earlier this year it pulled back on crude imports and cushioned what would otherwise have been a sharper shortage, but the Asian superpower has since resumed buying. That could mean Beijing views the disruption as durable enough to justify restocking, which would tighten the physical market further just as Alberta producers are watching the tape for confirmation that higher prices are here to stay.

Keystone Theater Aside, the Real Pipeline Debate Is About Diversification

President Trump’s social media post depicting himself pulling a Keystone-labeled pipeline from a grave marked “buried by Biden” generated headlines, but it is a signal rather than policy. We read the post as evidence the administration wants more Canadian crude and has an eye on Alberta’s export options. Those include the existing Bridger/South Bow line, which some people are calling the “don’t call it Keystone XL” pipeline, and on the potential for Western Canadian barrels to reach Asia.

Canadian producers are not rushing to commit to a costly Pacific-bound line while forward pricing still hovers near $75 a barrel for next year. Instead, they are waiting for the back end of the curve to confirm that today’s strength is structural rather than a supply-outage spike. Three options are in the mix:  Ontario Premier Doug Ford’s proposed East Coast line, a Pacific-bound option and the Bridger route. With energy notably absent from the current pause in Canada-U.S. trade talks, we expect the competition among these pipeline routes to shape Alberta’s next production cycle well before any shovels go into the ground.

Key Takeaways

Why are diesel prices at record highs even though crude oil is not?

• Diesel is priced off refining capacity, not just crude supply. With 7 to 8 million barrels a day of refining capacity offline globally because of Ukrainian strikes on Russian refineries and drone attacks in the Middle East, refiners are capturing a roughly $100-a-barrel margin over $85 WTI, a record crack spread driven by shortage pricing.

What is the significance of Trump’s Keystone pipeline social media post?

• We believe crude is discounted $10 to $15 relative to what physical stock levels imply, largely because of a one-time 150-million-barrel crude and product release tied to the U.S.-Iran memorandum, choppy Chinese buying behavior and suspicions of irregular trading activity are all weighing on bullish investor confidence. With six to eight million barrels a day of Middle Eastern supply still shut in and demand proving remarkably resilient, fundamentals will prevail and oil prices should march higher.

What factors are preventing global oil demand from growing as forecast?

• International buyers are now studying proposed Canadian pipelines and LNG developments, treating Middle East and Qatari supply as less reliable. This shift is reshaping how Canadian oil sands and LNG capacity are valued abroad.