US diesel crack spread breaks $106, hitting a record high; Trump faces "midterm election shock".

On September 1st, the U.S. diesel refining margin (diesel crack spread) broke through $106 per barrel, setting a new historical record. Meanwhile, retail prices approached $5.63 per gallon.

The energy crisis triggered by the Iran war is spreading throughout the economy, starting with diesel—pushing up inflation, depressing bonds, dragging down the stock market, and placing increasing political pressure on the Trump administration with less than two months until the midterm elections. Soaring diesel prices are directly impacting agriculture, trucking, and winter heating demand, and politically threatening the Republican Party's base in red states during the midterm elections.

On September 1, Trump urgently summoned refining giants including Marathon Petroleum, Phillips 66, Chevron, Delek US Holdings, PBF Energy, and Valero Energy to the White House for talks. According to the Financial Times, citing sources familiar with the matter, the meeting focused on how to expand refining capacity and lower fuel prices. Following the meeting, Trump posted on Truth Social, stating that he would provide environmental exemptions for small refineries and urge companies to expand their capacity.

Goldman Sachs subsequently raised its 2027 forecast for U.S. diesel refining margins from $27 to $63 per barrel, while EU refiners' forecasts were also revised upwards from $19 to $49. According to Bloomberg, Goldman Sachs analysts wrote in a research report: "The continued blow to Middle Eastern and Russian refineries has further squeezed already strained global refining capacity, driving product margins to new highs."

The US diesel crack spread (the difference between the price of diesel and other refined petroleum products and the price of crude oil) has broken through $106 per barrel.

Triple supply shocks make diesel the "core of the crisis".

Behind the soaring diesel prices is the simultaneous disruption of three supply chains.

First, the war with Iran has blocked the Strait of Hormuz. Since the US and Israel first launched attacks on Iran at the end of February this year, the export volume of refined oil products from the Persian Gulf has dropped to about 40% of the pre-war level, and crude oil exports have also dropped to only 70% to 80%. According to Bloomberg, the US launched another large-scale airstrike on Iran on September 1, and the Iranian Islamic Revolutionary Guard Corps immediately warned that it would give "severe punishment".

Second, Russia's refining capacity has declined significantly. The conflict between Russia and Ukraine continues unabated.

Third, Middle Eastern refineries have been damaged. According to Goldman Sachs data, the current scale of global refinery shutdowns is 60% higher than the seasonal average, and the International Energy Agency estimates that the Iranian attacks have taken nearly 3 million barrels per day of refining capacity offline.

According to data from the American Petroleum Institute, overall, global daily crude oil processing volume has decreased by approximately 5 million barrels compared to a year ago.

Diesel fuel was at the center of this price surge. Since February, the average wholesale price of refined petroleum products worldwide has risen by $40 per barrel, with diesel contributing more than 40% of the increase.

US refiners are operating at full capacity, but are nearing their limits.

Faced with a supply shortage, U.S. refiners are operating at record highs.

According to data from the U.S. Energy Information Administration, as of the week ending August 21, U.S. refinery capacity utilization had remained at 95% or higher for 12 consecutive weeks, the longest streak of high levels since 2000. Last week, capacity utilization further increased to 97.4%. The American Petroleum Institute stated that U.S. diesel production in July reached a record high for the same period.

However, this high-intensity operation is accumulating risks.

Some refineries have postponed routine seasonal maintenance, increasing the probability of unforeseen events. A recent report by Eurasia Group stated, "Seasonal inventories of diesel and residential heating oil are at historic lows, and several major refineries, including the large St. John's refinery in northeastern Canada, are scheduled for maintenance. If the situation in the Middle East does not ease, prices will rise further."

Rabobank global energy strategist Joe DeLaura said Trump might consider banning fuel exports, "which is his only card to play." However, he also noted, "He has to take measures to lower oil prices, but he won't give up this war."

Kevin Book, Managing Director of ClearView Energy Partners, bluntly stated: "The fastest path to price cuts may be a recession."

The "political bomb" of the diesel crisis

The politically damaging aspect of the diesel crisis lies in its precise attack on the Republican Party's core voter base.

According to Politico, the average price of diesel across the U.S. was $5.60 per gallon on Monday, September 1, up about $1 from early July and nearly $2 higher than a year ago. The record high of $5.816 set in June 2022 is within reach, while current inventories are at their lowest levels on record before the peak diesel demand season.

Diesel fuel is a core fuel for agricultural machinery, trucking, and winter heating. Its price impact first hit rural areas and blue-collar industries, which are precisely the traditional strongholds of the Republican Party.

Kevin Book of ClearView Energy Partners noted, "Diesel shortages will be acutely felt by farmers during the fall harvest, and the consequences of inflation could be even more severe during the harvest season." He added that voters in places like Maine and Alaska are preparing to buy heating oil for the winter, " There's a very strong historical pattern to pre-election focus on heating oil."

Dean Croke, chief analyst at DAT Freight & Analytics, listed diesel as a “lurking issue” for energy inflation this fall, noting that the truck driver shortage is further exacerbating transportation cost pressures. He said, “We’ve never seen anything like this before; what you’re seeing now is a real squeeze.”

Brown University tracking data shows that since the conflict began in February, Americans have paid an extra $52.3 billion for gasoline and $43.4 billion for diesel, an average of $730.81 extra per household, and the amount is still rising.

Jeff Colgan, a professor of political science at Brown University, said: “As consumers, Americans are paying higher prices for gasoline and diesel. As voters, we will see their answer in November.”

Tom Kloza, chief energy advisor at Gulf Oil, expressed reservations about Trump's pressure tactics: "The president has been very successful at driving down oil prices through verbal intervention via Truth Social, perhaps by chance, but certainly very successful. Without these verbal interventions, we would be seeing triple-digit oil prices now." However, he also cautioned: "Whether they are willing to break ties with an industry that has been very supportive of Trump is another matter."

Market ripple effect: Bonds, stocks, and gold all came under pressure.

The shockwaves of the diesel crisis have spread to the entire financial market.

On September 1st, US oil prices broke through $90 per barrel for the first time since the end of July. Simultaneously, US Treasury yields rose across the board, with the 10-year Treasury yield exceeding 4.75%, its highest level since January 2025; the Japanese 10-year government bond yield broke through 3%, the first time in 30 years. The probability of a September rate hike rose to over 70% that day.

Rich Privorotsky, head of Goldman Sachs' delta-one business, warned: "Energy is undoubtedly a complex issue facing the market. Even if Brent and WTI remain within their recent ranges, the signals from the refined product market are much more severe."

He further pointed out that diesel accounts for more than 40% of the $40 increase in the global average wholesale price of refined petroleum products since February. "If prices remain at current levels, they will put new upward pressure on overall inflation in the coming months."

In the stock market, the Nasdaq led the decline, with the transportation sector index plunging 2.5% in a single day, hitting a new low since May. Gold fell below $4,400, and Bitcoin fell below $77,000.

Priya Misra, a portfolio manager at JPMorgan Asset Management, said the Treasury’s bond buyback program could help boost demand for long-term bonds, but “it may be far less impactful than the supply shock brought about by the AI construction boom.”

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