Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Diesel Is Outpacing Oil in September
Transcript
- Lucas: If you have been watching the commodities desk lately, there is one number that is refusing to make sense, and it is sitting right next to the crude oil chart. While Brent crude has drifted lower, settling around ninety-five dollars, diesel fuel has surged almost seven percent in just five days. Luna: That is a massive gap. Usually, those two move together because diesel is just refined crude. What is breaking the link? Lucas: Exactly. The link is breaking because the bottleneck has moved upstream from extraction to processing. We are seeing a classic refinery squeeze. Refineries are running at high utilization rates, but maintenance schedules and unexpected outages are tightening the available supply of light products like distillates. When you take capacity offline, even for a week, the spread between crude and diesel widens instantly. Luna: So it is not about lack of oil in the ground, but lack of refineries turning it into truck fuel? That feels like an infrastructure problem masquerading as a commodity trade. Lucas: It is definitely an infrastructure issue, but it is playing out in real time on the futures market. Look at the natural gas numbers too. They are up seventeen percent in five days. Why does that matter? Because refining requires immense amounts of energy. If your input cost for heat and power spikes, your margin on every gallon of diesel shrinks unless you pass that cost onto the buyer. So you get a double pressure: less physical product and higher production costs. Luna: I remember reading about some of the major Gulf Coast refineries idling units for summer maintenance. Did that linger into fall? Lucas: It did, and it compounded with something else. There is a seasonal shift happening right now. We are in late September, which means the transition from summer gasoline blending to winter heating oil blends is starting to get priced in. Refiners have to reroute their complex processes. You cannot just flip a switch. They are optimizing for what will be needed in December, which often means pulling back on mid-tier distillates temporarily. It creates a vacuum in the current supply. Luna: But isn't demand for diesel supposed to be cooling if we are seeing signs of economic slowdown? I saw that headline about Treasury yields hitting fresh highs and the Dow falling. Isn't that a signal that industrial activity is slowing down? Lucas: That is the paradox, and it is where most traders get tripped up. Yes, macro indicators like the S&P 500 are wobbling, and bond yields are rising, which usually suggests a cooling economy. But diesel demand is sticky in specific sectors. Logistics companies have to move goods regardless of stock market performance. If inventory levels are low, they cannot delay shipments. So you see resilient demand even when broader economic sentiment is bearish. Luna: So the consumer is feeling the pinch at the pump, but the underlying demand hasn't vanished? That sounds painful for small businesses with thin margins. Lucas: It is extremely painful for small businesses. Think about a regional trucking firm or a logistics provider. Their fuel hedging strategies were based on last year's spreads. Now, with diesel jumping six or seven percent in a week, their operating costs spike overnight. They have to raise prices, which feeds into inflation. And here is the kicker: the core CPI data from August showed it creeping up again. This diesel spike is likely contributing to that stickiness in transportation costs. Luna: Wait, so this is actually feeding back into the inflation data we are tracking? I thought the Fed was worried about disinflation. Lucas: They are worried about exactly this kind of second-round effect. The ten-year breakeven inflation rate is down slightly to two point three three percent, but that includes expectations. If diesel stays elevated for another month, shippers will adjust their contracts. Then you see wages rise to match the cost of living, and suddenly you have wage-push inflation. It is a slow burn, but it is dangerous for the central bank's target. Luna: This feels like a structural shift rather than a temporary glitch. Are refiners investing enough new capacity to handle this volatility? Lucas: That is the million-dollar question. Capital expenditure in refining has been historically low for the past decade. Companies preferred to buy back stock rather than build new crackers. Now, they are paying the price for that discipline. Without new capacity, any disruption—whether it is a hurricane, a maintenance outage, or a geopolitical event—creates immediate scarcity. We are seeing the result of underinvestment in hard assets. Luna: It reminds me of the coffee shock episodes we did earlier. Supply chains are fragile everywhere, not just in food. The energy grid seems equally brittle right now. Lucas: Very similar dynamic. In both cases, you have global interdependence meeting local fragility. A problem in one region, or even one facility, ripples through the system instantly. The difference with energy is that it is essential for everything else. You can stop buying coffee, but you cannot stop moving goods. That makes diesel demand inelastic in the short term, which drives the price volatility even higher. Luna: So for investors watching this, should they be looking at energy stocks or avoiding them entirely given the broader market downturn? Lucas: It depends on which part of the energy stack you are looking at. Upstream explorers might be struggling with lower crude prices, but midstream and refining companies could actually benefit from these wide cracks. The margin between buying crude and selling diesel is expanding. Companies with strong refining capabilities might see earnings growth even if the overall market is red. It is a niche opportunity within a tough macro environment. Luna: That is a really specific angle. Most people just think 'oil down, bad.' But you are saying the refiners might be winning while the drillers lose? Lucas: Precisely. Look at the XLE, the energy select sector ETF. It is down two percent recently, but that is an average. Some pure-play refiners are holding up better than the integrated majors. The majors are diversified, so they absorb the shock differently. But if you want to play this divergence, you look at the margins, not the commodity price itself. Luna: It makes me wonder if this diesel spike is a leading indicator for something bigger. Like, is it signaling that logistics costs are about to explode across all sectors? Lucas: I think it is a warning shot. If freight rates start climbing because trucks are charging more for fuel, then retail margins will get squeezed. We already saw some retailers complaining about shipping costs earlier this year. This could be the thing that forces them to cut back on hiring or reduce inventory orders. It is a subtle drag on the economy that doesn't show up in GDP until it is too late. Luna: That is scary. So the consumer doesn't feel it immediately, but the business side feels the pain first. Who gets hit harder, the retailer or the manufacturer? Lucas: The manufacturer usually gets hit first because they pay for raw material transport. The retailer absorbs the final mile cost. But if the manufacturer raises prices to cover fuel, the retailer either eats the margin or passes it on. It is a cascade. And with interest rates high, borrowing money to cover these temporary gaps is expensive. Liquidity is tight everywhere. Luna: High rates plus high fuel costs. That sounds like a recipe for a lot of bankruptcies in the logistics sector by Q4. Lucas: We are already seeing consolidation. Smaller carriers are getting bought out or going under. It is a brutal optimization cycle. The survivors will be the ones with efficient fleets and good hedging strategies. For everyone else, it is a fight for survival. Luna: Speaking of survival, if walking through these market shifts with us has made something click for you, consider supporting the show. It helps keep this ad-free content coming. You can find the link at buy me a coffee dot com slash fexingo. Lucas: Every bit of support helps us dig deeper into these stories. Thanks for listening. So, do you think the Federal Reserve will react to this diesel-driven inflation, or will they assume it is too transient to warrant a policy shift?