Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Heating Oil Inventories Are Defying the Crude Rally
Transcript
- Lucas: Crude oil had a monster week. West Texas Intermediate is up about nine and a half percent over the last five trading sessions. Brent, about six percent. And if you only looked at that headline, you'd think the oil market is on fire. Luna: But it's not that simple, right? Because heating oil futures — or more broadly, distillate products like diesel and jet fuel — they're not participating in the rally. Lucas: Exactly. In fact, heating oil futures are basically flat week over week. And if you look at the distillate crack spread — that's the profit margin for refiners turning crude into diesel and heating oil — it's actually fallen sharply. So the market is sending a very clear signal: the crude rally is about supply fears, not demand. Luna: And the supply fear this week is obviously the proposed tariffs the U.S. floated on sixty economies over forced labor trade practices. That's a huge potential disruption. Lucas: Right, that headline landed yesterday. And crude jumped because a significant chunk of refined product imports come from countries that could be affected. But here's the thing: the tariff story is about future supply. The distillate market is about right now. And right now, we have a problem with demand. Luna: What kind of numbers are we looking at for distillate demand? Lucas: The latest EIA data shows distillate inventories are building — they're about six percent above the five-year average for this time of year. And that's happening at a time when we normally see draws ahead of summer driving season and construction activity. So something is off. Luna: And diesel demand is closely tied to the broader economy. Trucking, construction, manufacturing — all of that slows when the economy slows. Lucas: Exactly. And we've got a few indicators pointing to a slowdown. The April CPI came in at 332.4, up from 330.29. That's not a huge jump, but it's persistent. And the core PCE price index ticked up to 130.9. So inflation is sticky. The Fed is not cutting rates anytime soon. That weighs on industrial activity. Luna: So higher rates mean less construction, less trucking, less freight. Less diesel burned. Lucas: Exactly. And then you layer on the fact that China's refining output is still running at record levels. They're exporting diesel and gasoil into the global market at a time when demand is softening. So we've got this weird dynamic: crude supply is tightening on geopolitical risk, but product supply is abundant because of weak demand and strong Chinese exports. Luna: Which means refiners are getting squeezed. They're paying more for crude — because of the tariff risk — but they can't pass those costs through to diesel buyers because the market is oversupplied. Lucas: Exactly. The crack spread for diesel has dropped to its lowest level in over a year. And that's a problem for integrated energy companies like ExxonMobil and Chevron. Their refining margins are a huge profit driver. If those margins compress, it offsets any gains they get from higher crude prices. Luna: And yet, energy stocks have been rallying too. The XLE is up 1.7 percent over the last five days, and the oil and gas exploration ETF, XOP, is up 3.4 percent. So the market seems to be pricing in higher crude, but maybe not the refining margin squeeze. Lucas: That's exactly the disconnect. And it's why we're seeing some analysts downgrade refiners relative to producers. If you're a pure-play upstream company, you benefit from higher crude. But if you're a refiner, you're in a tough spot because your input costs are rising faster than your output prices. Luna: So what does this mean for the crude rally? Can it continue if the middle of the barrel is signaling weakness? Lucas: Historically, when crude rallies on supply fears but distillate inventories are building, it's a fragile rally. And if the tariff story fades — if negotiations happen, or if the tariffs are narrower than feared — crude could give back those gains pretty quickly. But there's another scenario where crude stays elevated because of actual supply disruptions, and refiners just have to eat the margin compression. Luna: So the key thing to watch is whether distillate demand picks up as we head into summer. If it does, the crude rally has legs. If not, we might be looking at a correction. Lucas: And by the way, this is exactly the kind of conversation that makes you realize how much context matters in markets. It's not just about crude going up or down — it's about the relationships between different parts of the barrel, and what they tell us about the economy. Luna: It's the kind of perspective we try to bring to every episode. And we do it without any ads, which — if you've ever wondered why we don't have commercial breaks — it's a choice. We want the conversation to flow naturally, without interruptions. Lucas: Yeah, and we're able to do that because of listeners who support the show directly. If you find this kind of analysis useful and want to help keep it ad-free, the link is buy me a coffee dot com slash fexingo. No pressure, just an option. Luna: And it really does make a difference. So back to the distillate story — one other thing I wanted to mention is the impact on diesel for trucking. We're seeing freight volumes softening in the U.S., and that's directly tied to consumer spending patterns. Lucas: Right. And that's where the trade tariff story actually connects. If the U.S. imposes tariffs on a broad set of economies, it's going to disrupt supply chains, which could further reduce trucking demand. So the distillate weakness could actually be self-reinforcing. Luna: Unless the tariffs lead to domestic manufacturing picking up, which would increase demand for diesel — but that would take time. Lucas: Exactly. So in the near term, the crude rally looks like a supply scare, not a demand revival. And the distillate market is the canary in the coal mine. If you're trading energy, watch the crack spreads, not just the headline crude price. Luna: Good advice. So what's the one number you're watching this week? Lucas: I'm watching the diesel crack spread. If it stabilizes or starts to recover, that would suggest demand is holding up. If it keeps falling, I'd be cautious on the crude rally. And I'd also keep an eye on the EIA inventory report next Wednesday — that will tell us if distillate builds are accelerating. Luna: And we'll be back to break it down. Thanks for listening. Lucas: Take care.