ULSD at $4.76/gal: Distillate Tightness and Refinery Capacity Losses Create a Structural Floor — Fleet Buyers Must Hedge

Distillate Markets: Structurally Tight and Getting Tighter

US ultra-low sulfur diesel prices averaged an estimated $4.76/gal in 2026, significantly higher than pre-2022 averages of $2.50-3.00/gal (FACT: EIA STEO, May 2026). The key driver is not crude oil alone — it is structurally constrained refining capacity. US refining capacity is projected to shrink to approximately 17.9 million barrels per calendar day by end-2025, a 3% contraction (FACT: EIA, November 2025).

The Phillips 66 Los Angeles (Wilmington) refinery closure at the end of 2025 removed approximately 139,000 b/d of capacity, heavily impacting West Coast diesel supply. With Valero's Benicia refinery also reducing runs, California's diesel import dependency is rising.

Globally, the IEA's April 2026 Oil Market Report describes that Middle East and feedstock-constrained refineries in Asia cut runs by approximately 6 mb/d in April 2026 (FACT: IEA OMR, April 2026). The Strait of Hormuz closure disrupted crude flows to Asian refineries, creating a global distillate supply shock.

Where the Consensus Is Wrong: The Refinery Floor Is Permanent

The consensus expects diesel prices to normalize as crude prices fall. EIA's pre-crisis forecasts projected US diesel at $3.50/gal in 2026 (FACT: EIA STEO, November 2025). Actual prices are tracking $4.50-5.00/gal due to structural refinery losses that will not be rebuilt.

The US has not built a new grassroots refinery since 1977 (Marathon's Garyville expansion). Refinery capacity exits are permanent in most cases — converting a refinery to renewable diesel or terminal storage eliminates petroleum diesel production permanently. The Phillips 66 Wilmington conversion to a renewable diesel facility will remove 139,000 b/d of petroleum diesel capacity permanently.

Globally, the trend is similar. Europe has lost 3 million b/d of refining capacity since 2020 (FACT: IEA, 2025). Asia faces feedstock constraints. Only the Middle East is adding capacity. The structural decline in global refining capacity means diesel crack spreads will remain elevated.

Crack Spreads: Refinery Margins Signal Scarcity

Diesel crack spreads at New York Harbor averaged $1.42/gal in March 2026, the highest monthly level since 2022 and well above the 2021-2025 five-year average of $0.68/gal (FACT: EIA, April 2026). This crack spread is the refinery margin proxy — it measures how much of the diesel price is attributable to refining costs (not crude).

The elevated crack spread reflects three factors: (1) reduced US refinery capacity, (2) global feedstock disruptions from the Hormuz closure, and (3) strong demand from trucking, agriculture (harvest season), and heating oil in winter months.

Diesel crack spreads typically peak in winter (heating oil demand) and summer (harvest + construction). With inventories at multi-year lows, seasonal demand spikes will amplify price movements. EIA data shows distillate inventories were drawn significantly below 2024 levels in Q1 2026.

Regional Breakdown: The Uneven Diesel Market

West Coast (PADD 5): The tightest US diesel market. Phillips 66 Wilmington closure and Valero Benicia reductions removed approximately 200,000 b/d of local capacity. West Coast diesel prices average $4.10/gal regionally, with spot premiums exceeding $2/gal over NY Harbor during refinery outages (FACT: EIA, January 2026).

US Gulf Coast (PADD 3): The most supplied region due to refinery concentration. PADD 3 exports diesel to Latin America and the US East Coast. Basis differentials to NY Harbor are typically $0.15-0.30/gal.

Europe: Tight. EU sanctions on Russian diesel imports (fully phased in 2023) removed approximately 600,000 b/d of supply. European refineries face high energy costs and carbon compliance. EU diesel prices trade at premiums to USGC of $0.50-1.00/gal.

Asia: Feedstock constrained. Asian refineries dependent on Middle Eastern crude lost supply due to Hormuz disruption. Gasoil cracks are elevated, and some refineries have cut runs. Singapore diesel benchmarks reflect tight regional supply.

What We Do Not Know

The duration of the Hormuz disruption and its impact on global refinery crude supply. Even after the strait reopens, refinery crude slate adjustments take 2-3 months to normalize (ESTIMATE: IEA, April 2026).

The pace of renewable diesel capacity additions and whether they will materially offset petroleum diesel losses. Current renewable diesel capacity in the US is approximately 3 billion gallons/yr, compared to 50+ billion gallons of petroleum diesel (ESTIMATE: EIA, 2026).

Whether the US will release additional diesel from the Northeast Home Heating Oil Reserve or other strategic stocks to mitigate supply tightness.