Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Diesel Prices Are Diverging From Crude in 2026
Transcript
- Lucas: So crude oil has gotten absolutely hammered this week. West Texas Intermediate is down more than eleven percent over the last five days. But if you filled up a diesel truck this morning, you probably didn't notice. Luna: Right — I was looking at pump prices on the way in, and diesel is basically flat. What's breaking the correlation? Lucas: It's a classic refining bottleneck. Crude is a raw input, but what we actually burn is gasoline, diesel, jet fuel. And right now, the system that turns crude into those products is stretched in a very specific way. The global benchmark for diesel in Europe — what's called ultra-low sulfur diesel — is trading at a premium to crude that's nearly double the five-year average for this time of year. Luna: So refiners are the chokepoint. What's causing it? Lucas: A few things hitting at once. First, U.S. refinery capacity has actually shrunk. Since 2020, we've permanently closed about one million barrels per day of capacity. The big one was LyondellBasell's Houston refinery, which shut down in early 2024. That refinery alone processed about 260,000 barrels a day. When those plants go offline, they don't come back — the margins just aren't there for older, complex refineries to justify the maintenance. Luna: And you've got demand on the other side that's surprisingly strong. I was reading about diesel consumption in mining — Western Australia's LNG and iron ore operations basically run on the stuff. That's not going away. Lucas: Exactly. Mining, agriculture, trucking — these are non-discretionary uses of diesel. And now we've added a new one: data centers. Backup generators for AI server farms are almost all diesel-powered. So even as passenger vehicle demand for gasoline starts to plateau, diesel demand keeps growing. The International Energy Agency said last month that global diesel and gasoil demand will hit a record 28.3 million barrels per day in 2026. Luna: So you've got less refining capacity and more demand. That explains the premium. But why is this happening right now, this week? Lucas: Timing. May is when a lot of U.S. refineries do their spring maintenance — they switch over from winter-grade to summer-grade fuels. Utilization rates have been running around 85 percent, which is unusually low for this point in the year. Bloomberg reported last week that several Gulf Coast refineries have extended turnarounds because of labor shortages and equipment delays. So even before crude fell, diesel supplies were tight. When crude drops, refiners don't immediately cut diesel prices because they're still covering their fixed costs and margins. Luna: And if they cut runs — meaning they process less crude — diesel supply gets even tighter. So you get this weird dynamic where lower crude prices don't translate to lower pump prices. It's like the downstream market is decoupled. Lucas: Right. And the markets reflect that. The 3-2-1 crack spread — which is basically the profit margin for turning three barrels of crude into two barrels of gasoline and one of diesel — has widened significantly this week. It's around $28 a barrel, which is up from about $20 a month ago. That's a clear signal that product prices are holding up even as crude slides. Luna: So who's getting squeezed here? The refiner is making money, but the consumer at the pump isn't seeing relief. Is there any policy lever? Lucas: There's not much the government can do in the short term. The Strategic Petroleum Reserve release that happened in 2022 was about crude supply, not refining capacity. You can't refine crude you don't have. But you also can't refine it if you don't have operating plants. The Biden administration tried to incentivize refinery maintenance and even considered waiving some summer-blend requirements, but those are temporary fixes. The structural issue is that the U.S. has lost about 5 percent of its refining capacity since 2020, and global diesel demand is still growing. Luna: And it's not just the U.S. Europe has lost even more capacity. I think the EU has lost about 1.5 million barrels a day of refining capacity since 2020. So globally, the system is just tighter. Lucas: And that's why this disconnect matters. If you look at the May 2026 CPI report released a few weeks ago, the energy index was still up year-over-year. Gasoline was actually down a bit, but fuel oil and diesel were up. That's the real-world pass-through: even as headline crude falls, the stuff that heats homes and powers trucks keeps getting more expensive. Luna: You know, it's funny — we talk about the economy through these market numbers, and I think a lot of listeners, myself included, appreciate when we actually connect the data to what people feel at the pump. And I think that's part of why this show works. Lucas: Yeah, I mean, we do this every day because we genuinely find these connections fascinating. And a handful of listeners have actually started supporting the show directly through buy me a coffee dot com slash fexingo. That's what keeps it going ad-free — it's just a small group, but it makes a real difference. Luna: Absolutely. And it lets us spend time on exactly these stories — the ones that explain the 'why' behind the numbers. So if you've gotten something out of the show, that's the place. Lucas: Alright, back to the diesel crunch. So one other factor nobody's talking about is the shift in global trade flows. Because of the Red Sea disruptions, ships are taking longer routes around the Cape of Good Hope. Those ships burn bunker fuel, sure, but they also need diesel for auxiliary engines. And longer voyages mean more diesel consumption. Luna: That's a demand increase that literally started two years ago and hasn't reversed. Even if the Red Sea calms down — and there are reports this weekend about a potential ceasefire extension — the rerouting has become the new normal for many shippers. Lucas: So you've got a situation where every marginal barrel of diesel is spoken for. And when crude drops, the refiner has no incentive to slash diesel prices because they know the buyer is there. The only way this breaks is if refineries ramp up utilization — which they're trying to do — or if demand falls off a cliff. And with summer driving season and construction season starting, demand is actually about to peak. Luna: So what's the one number listeners should watch for the rest of May and into June? Lucas: Weekly refinery utilization from the EIA, published every Wednesday. If it stays below 90 percent as we head into June, diesel prices are going to stay elevated even if crude goes to 90. That's the real-time tell. The other number is the diesel-crude spread — if it narrows, it means the bottleneck is easing. If it stays wide, we're in for a summer of expensive diesel. Luna: And expensive diesel means more expensive everything — food, construction, goods. It's a hidden inflation driver that doesn't show up in the headline CPI the way gasoline does. Lucas: Exactly. The CPI headline might look okay if gas is flat, but diesel feeds into every supply chain. So it's one of those quiet forces that can keep core inflation stickier than people expect. We'll be watching that spread closely. Luna: Alright, let's keep an eye on those EIA numbers. And for anyone who wants to dig deeper, we'll link the data in the show notes. Lucas: And as always, thanks for being here. That's it for today's Commodities Economy. We'll be back tomorrow with another angle.