Low Tanks, High Margins: Why Product Cracks Are at Records, and How Long They Are Likely to Last

“Refining margins are at all-time highs! $100 cracks! Buy refining stocks?!” We’ve seen the heady buzz around refinery cracks and stock performance. Checking the stocks, the four major American refiners are in fact all up over 100% in the past 12 months, well outperforming the S&P 500 (except P66, but 96% is close!).

Major U.S. Refiner Stock Performance (past 12 months)Source: Google Finance as of September 9, 2026

The easy call is that recent refinery cracks are a geopolitical spike that will quickly fade when the Strait of Hormuz reopens. But crude prices have moved up and down this year, and the diesel crack set new record highs on both moves.

This piece analyzes the recent record-high cracks in diesel, lays out the data for why we think demand destruction is occurring, and shows how global demand is setting U.S. prices. We also analyze inventory drains from the start of the Russia-Ukraine war in 2022 as a guide to how long it’ll take to replenish inventory. Spoiler alert: if 2022 is any guide, refilling tank inventory will take far longer than draining the tanks did, and product cracks could remain elevated for as long as inventories stay low, perhaps justifying the refiners’ stock prices.

Diesel Cracks Break $100/bbl and Signal Marginal Demand Destruction

In a normal market, the flat price of crude plus the marginal cost to produce products through a refinery sets the crack. That’s not what’s happening right now. Instead, refineries are running all out (>97% utilization!) and can’t keep up with demand. Instead, they’re drawing down inventory to place product, especially diesel. Instead of marginal refinery capacity setting the price, inventory drawdown and the marginal customer’s willingness to go without product are setting the price.

Essentially, when the world drains its tanks to cover a product shortage, product prices spike, and right now, diesel tanks are at historic lows.

U.S. Total Distillate Storage (thousand barrels)Source: EIA

Higher crude prices normally squeeze the crack spread, but margins have widened to record highs even as crude prices soar – see the below price chart.

WTI and Diesel Prices – U.S. Gulf Coast ($/bbl)
Source: EIA and Stillwater Associates Analysis

Brent ran from $67 in January to $117 in April, fell to $82 by July, and is back near $97 (as of September 9, 2026) as the Hormuz quagmire continues. While the diesel price initially responded to the moves up and down, three things changed vs. historic behavior:

1. World diesel supply is dramatically constrained. Barrels are stuck inside the Strait of Hormuz, offline in Russia due to Ukrainian attacks, or simply not being brought to market by export bans (e.g., in China). We estimate that 1.5 million barrels per day are off the world market, or ~5% of world diesel demand. This widens the crack.
2. When the Strait failed to reopen at the start of July, the diesel price rose back toward $170+/bbl, despite crude prices remaining lower. This indicates that running refineries can find crude supply, but the amount of product they’re producing is less than demand. In short, the constraint is refineries, not crude.
3. Distillate prices are facing backwardation. As of September 9, MarketWatch quotes New York Harbor Heating Oil (the best proxy for diesel) futures dropping by >$1/gal ($42/bbl) in 2027. For a refiner or trader this means one thing: sell the inventory; it’s worth more today.

Recent Heating Oil Contracts
Source: MarketWatch

Put these three trends together, and the diesel price stopped correlating as strongly with the crude price. We can see this when we plot the two prices against each other, pre- and post-Strait of Hormuz closure:

Diesel Price to Crude Price CorrelationSource: EIA and Stillwater Associates Analysis

Historically, the diesel price correlated strongly with crude (R² = .7009) and had a nicely positive slope ($1 increase in crude leads to $0.65 increase in diesel). Today, we see a much weaker correlation (R²=.3991) and a nearly flat slope ($1 increase in crude leads to a $0.05 increase in diesel).

In the below chart, we zoomed in further on the diesel/WTI correlation for diesel price points above $160. If you’re looking for a trend, stop squinting – there is none; the R² was .05.

Diesel-WTI Correlation (Diesel Flat Price >$160)

Source: EIA and Stillwater Associates Analysis

Our theory is that the diesel price is responding to marginal demand destruction. The data isn’t available yet to prove this (there’s a few-month lag on volume movements from EIA and other sources), but the implication is that the diesel price is settling at the highest price customers are willing to pay that moves the available barrels. Since fewer barrels are available than before the war, and inventories are reaching historic lows, someone who otherwise would buy diesel fuel is going without. This is demand destruction.

A word of caution for refiners: prices are likely near their ceilings, given available supply. A step change up in crude prices won’t lead to a corresponding increase in product prices – just a squeeze on refining margins.

As we mentioned above, all of this is leading to a drain in distillate stocks. Here’s the change in inventory level again, this time expressed as a percent reduction, with gasoline presented as a counterpoint.

U.S. Gasoline & Distillate Stocks vs. 5-year Seasonal Average
(week ending August 14, 2026)
Source: EIA Weekly Petroleum Status Report

Why Are Prices So High in the U.S.?

Despite recent refinery closures, the U.S. maintains significant spare refining capability above domestic product demands. Since refiners are allowed to export, the marginal U.S. distillate barrel doesn’t remain in country; it flows to where the price is highest, net of freight. When trade flows in the Middle East, Europe and APAC are disrupted, the U.S. price converges to the highest world price to make up the supply gap in those regions.

Table 1. U.S. distillate balance four weeks ending August 14, 2026 (MMb/d)Sources: EIA Weekly Petroleum Status Report; normal export rate is the EIA 2024 annual average.

Table 1 shows that the demand on U.S. refineries (domestic demand + exports) exceeds refinery production. Roughly a third of the distillate U.S. refineries make is headed for the export dock. This is about 400,000 bbl/day above the normal export level prior to the Hormuz disruption. The math also implies 140,000 bbl/day of inventory drawdown.

Refineries are running 97.2% full; there is no upside production headroom. That leaves inventory as the only remaining balancing item. This could get worse in the near term as winter maintenance programs and unplanned outages (think of refineries like a car engine and imagine you’ve been driving with the pedal floored for six months straight) can cut into product output just as diesel demand starts ramping up for harvest season and winter heating.

The export demand pull is also visible in domestic prices. The price differential for New York Harbor vs. Gulf Coast ULSD collapsed from 19.9 cents per gallon (cpg) in February to 4.0 cpg in July, against a 2024-2025 average of 8.3 cpg. That spread is what normally pays a Gulf Coast refiner to ship diesel north to New York instead of loading it onto a ship for export. At 4.0 cpg the spread cannot cover the freight north, so the diesel is exported, predominantly to the EU and Latin America. Prices will have to rise in New York to keep the volume domestic.

How Long? Use 2022 as a Guide

Russia invaded Ukraine in 2022, leading to sanctions on Russian oil and refined products and a supply crunch similar to today. In 2022 the diesel price peaked >$200/bbl even as crude crested $100/bbl. Both prices eased off by about half within six months, and the crack ground its way down to normal levels by late 2024 – roughly two and a half years after the peak. It was the classic rockets-and-feathers dynamic – prices jumped like a rocket and settled like a feather.

Russia-Ukraine War Diesel Price Impacts ($/bbl)

Source: EIA and Stillwater Associates

It’s worth being specific about how the 2022 spike resolved because it did so without a global recession. Russian barrels were rerouted rather than lost, moving to Brazil, Turkey and Africa while U.S. and Gulf barrels backfilled Europe. In addition, a wave of new refining capacity arrived at the right moment, namely Al-Zour in Kuwait, Duqm in Oman and Dangote in Nigeria, adding 1.5 MMb/d of capacity between them. And demand also softened: U.S. diesel demand contracted about 2% in 2023.

Two of those three ways out are not available today. In 2022 Russia’s distillate barrels still got produced; they just found new buyers. Now their refineries are being bombed, reducing production, and the country has banned exports. You cannot reroute a barrel that does not exist. The new refineries that helped resolve the 2022 spike are already built and running, and nothing comparable will open for two years. That leaves demand destruction as potentially the only mechanism to rebuild product inventories without an opening of the Strait of Hormuz.

Bottom Line

The crack isn’t a geopolitical premium and it has largely decoupled from crude prices – it’s being set by marginal demand destruction due to an absence of supply.

In 2022, it took two and a half years to normalize, and that was with all three unwind mechanisms working at once: rerouted Russian barrels, new refining capacity, and softer demand. This time, two of those three are structurally off the table: the Russian barrels can’t be rerouted, and no comparable capacity arrives for at least two years. This time, demand destruction has to close the gap on its own, which means either a much larger pullback than 2023’s demand easing, or a recession-sized one.

For investors in refineries, this cuts both ways. Betting on a quick fade back to “normal” cracks looks too aggressive, given the Strait is still closed and inventories are so low. But there’s tail risk of permanent demand loss and sustained low margins, and the high stock prices are only justified by higher-than-historical returns.

For refinery operators, there isn’t much cleverness required. Everyone is at max utilization, so the job is to stay running, stay up, and not lose processing days. This looks like a long summer rather than a sunny afternoon, long enough to plan around sustained high margins, while remembering no summer lasts forever.

The distillate squeeze will play out differently for each refiner, marketer, trader, and investor. Stillwater Associates helps clients turn this kind of market analysis into decisions – turnaround timing, supply strategy, inventory positioning, and transaction diligence. To discuss what low tanks and high margins mean for your business, contact us!