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Monday's Bonus Story A Christmas Stress Test: Why Diesel Pricing Stress Means ProfitsReported by Jeffrey Neal Johnson. Posted: 12/30/2025. 
Summary- The structural shortage of diesel fuel has created a supply shock that keeps profit margins historically high for companies that manufacture the product.
- Valero Energy utilizes its highly efficient refining network to capture maximum value from the current disconnect between fuel prices and freight volume.
- Phillips 66 is actively reshaping the market and unlocking shareholder value by streamlining its portfolio and closing high-cost assets to tighten supply.
Every December, the global supply chain undergoes a massive pressure test known as the Christmas Stress Test. In a typical year, millions of holiday packages flood the logistics network. That surge usually pushes freight volumes and fuel demand higher at the same time. The 2025 holiday season, however, produced a rare anomaly that has many investors puzzled. REVEALED: America just unlocked a $500 trillion asset
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One company is already in position and this could be one of the most important AI infrastructure plays heading into 2026. The name and ticker are available here now >>> Freight volumes remained relatively soft, suggesting consumers and businesses were spending cautiously, yet diesel prices surged. That creates a disconnect with basic supply-and-demand logic: weak demand normally depresses fuel prices, but the cost of moving goods rose even as volumes fell. For general industrial stocks such as FedEx (NYSE: FDX) and retailers like Amazon (NASDAQ: AMZN), this is a clear warning sign. Higher operating costs combined with soft volume typically mean narrower profit margins heading into the first quarter of 2026. By contrast, refiners stand to benefit. Companies that convert crude into diesel are seeing a profit windfall. Valero Energy (NYSE: VLO) and Phillips 66 (NYSE: PSX) are particularly well positioned to capitalize on a market that is structurally short on diesel supply. The December Crack Back and the Diesel Margin SurgeTo understand why refinery stocks are rallying, investors need to know the crack spread. This metric measures the difference between the purchase price of crude oil and the selling price of refined products like diesel—it's essentially the refiner's gross profit margin. In the fourth quarter of 2025 the market experienced what traders have dubbed the December Crack Back. Margins for Ultra-Low Sulfur Diesel (ULSD) in the New York Harbor market jumped to roughly $49 per barrel in late December—more than double the low $20s seen in October. That spike wasn't driven by booming economic demand but by a supply shock. Three forces collided to keep prices elevated: - Geopolitics: Tightened sanctions on Russian oil companies such as Rosneft and Lukoil in late 2025 removed a significant volume of diesel from the global export market.
- Winter weather: Diesel and home heating oil are chemically similar. A late-2025 cold snap increased demand for heating oil, drawing down the same inventories needed for trucking.
- Capacity cuts: Domestic refiners have permanently closed some facilities to reduce costs, leaving fewer barrels available overall.
For the broader economy, high fuel prices amid a freight recession raise the risk of a harder slowdown in 2026. For refiners, though, the supply shortage creates a high profit floor: even if fewer trucks are on the road, the margin on every gallon of diesel remains historically large. Valero Energy: The Operational PowerhouseIn a tight market, the refiner with the most available, functioning capacity stands to benefit the most. Valero has emerged as a clear operator's choice. The stock has outperformed the broader energy sector, gaining roughly 35% year-to-date. Valero's playbook is operational excellence. While some competitors wrestled with complex restructurings, Valero focused on running its facilities reliably. In the third quarter of 2025, the company reported earnings per share (EPS) of $3.66, beating analyst expectations. The company has been running refineries at near 97% utilization—critical when margins hover around $49 per barrel. High utilization in this environment converts directly into substantial free cash flow. Valero is also expanding beyond conventional fuels. Through Diamond Green Diesel (DGD), its joint venture with Darling Ingredients, Valero is producing renewable diesel. The Port Arthur expansion completed earlier in 2025 also enables Sustainable Aviation Fuel (SAF) production, giving the company a diversified revenue stream that appeals to investors focused on long-term sustainability. Phillips 66: The Architect of the SqueezeWhile Valero profits from running hard, Phillips 66 has helped reshape the market by taking capacity offline—an action that has tightened regional supply and supported higher margins industrywide. In October 2025, Phillips 66 ceased crude processing at its Los Angeles refinery (Wilmington/Carson), removing roughly 139,000 barrels per day from the West Coast market. That removal tightened local supply and pushed up prices for the fuel produced by remaining refineries. This aggressive posture has been influenced by pressure from activist investor Elliott Investment Management, which pushed Phillips 66 to improve performance. In response, the company launched the Streamline 66 initiative to cut costs and boost shareholder returns. Phillips 66 has executed on that plan, surpassing its $3 billion divestiture target by late 2025 through asset sales that included its stake in a Swiss retail business and several pipeline assets. Investment firm Raymond James maintained an Outperform rating on the stock in late December, citing the effectiveness of these self-help measures. For investors, Phillips 66 represents a strategic play that unlocks value via cost reductions, share buybacks and a more efficient asset base rather than relying solely on production volume. 2026 Outlook: How to Position Your PortfolioThe 2025 Christmas Stress Test clarified the investment landscape heading into 2026. A structural shortage of diesel refining capacity has emerged, which helps insulate refiners from some of the economic headwinds that could hurt other industrial sectors. Investors looking to trade this disconnect generally have two paths: - The Offensive play: Valero Energy offers immediate exposure to elevated profit margins. High utilization rates and established renewable-diesel operations position it as a primary beneficiary of the current price environment.
- The Strategic play: Phillips 66 offers a restructuring story. By closing higher-cost assets and executing divestitures, it is unlocking balance-sheet value and improving returns for shareholders.
As we move into 2026, the data suggest that while higher shipping costs may weigh on the economy, refiners—rather than shippers or many industrials—look like a relative bright spot for portfolios.
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