medium convictionactive · updated 2026-07-17T00:00:00.000Z
Hormuz crude jailbreak + refining bottleneck → record crack spreads → refiners capture the split (VLO)
The petroleum market has split: crude is the weakest part of the complex (Hormuz jailbreak of ~125-130% of pre-war supply surging into a China-absent Asian market → front-month contango) while refined products are the tightest (Middle East refineries hobbled, Russia's refined exports at post-COVID lows from Ukrainian strikes, low inventories everywhere), pushing diesel and gasoline crack spreads to seasonal all-time highs. Refiners, not crude producers, capture the spread — VLO is the named expression.
The chain
1
The post-ceasefire Hormuz 'jailbreak' is surging ~125-130% of pre-war Middle East supply out — but predominantly crude, juiced by a floating-storage drawdown that has only a week or two left (fresh loadings ~5-6M bbl/d vs ~12M bbl/d exiting).
rory-johnston in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "We've probably seen days where we've had kind of 130% or so of pre war supply coming out of the Middle East... most notably the drawdown of the long stranded barrels that have been floating in the Gulf... by our numbers you can only likely sustain that for another week or two... we've seen give or take kind of 12 million barrels a day getting out of Hormuz, but we've only seen loadings of around 5 ish, 5 to 6 million barrels a day."
rory-johnston in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "For all of the offset near the rerouting pipelines through the Red Sea and the Fujairah, that's all been crude."
2
That crude surge lands in an Asian market where China — a ~5M bbl/d import delta vs pre-war, apparently a discretionary Beijing policy choice — is absent as a buyer, producing a spot crude surplus: front-month Brent/Dubai in contango, physical DFLs below futures, crude the weakest part of the petroleum complex.
rory-johnston in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "Indisputably the market is telling us right now that we currently have a spot surplus of crude oil in the market. And we know that because the front of the futures curve for Brent and for Dubai... the prompt spread is in contango... Now those physical prices are lower than futures."
rory-johnston in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "The delta in crude imports we saw between the December to February average... to the average we... imported through June was a 5 million barrel a day delta... it appears to me... to be a discretionary policy choice by Beijing because you have not seen any real dislocation in domestic mobility indicators."
3
Refined products are simultaneously the tightest part of the market: refining capacity is the bottleneck — Middle East refineries hobbled, Russian refined-product exports at their lowest since before COVID (Ukrainian strikes) while Russian crude exports hit all-time highs, very low product inventories across all major hubs, and the pre-war 5M bbl/d of Hormuz product flow not yet resupplied.
rory-johnston in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "Ukrainian attacks against Russia have been very effective. You're seeing refined product exports out of Russia around the lowest level we've recorded since before COVID and crude exports are hitting all time highs... with fewer and fewer refineries in the system and the refineries in the Middle east still hobbled, we're just not seeing the demand for crude that is currently surging out of Hormuz."
rory-johnston in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "Prior to the war... that was 15 million barrels a day of crude and 5 million... barrels a day of product. We're going to need to get more work done on resupplying that 5 million barrels a day of product... you're going to remain tight here until Middle Eastern refineries recover."
4
The result is crack spreads at seasonal all-time highs — diesel ~$60/bbl and gasoline ~$50/bbl versus ~$20 norms, retesting the 2022 records, and at an all-time high as a proportion of the underlying crude price (diesel cracks nearly as large as WTI flat price).
rory-johnston in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "Diesels back up around 60 bucks a barrel versus like a norm of like 20ish. And gasoline also normal 20ish crack spread right now is up around 50... we're retesting the all time high crack spreads or seasonally all time high crack spreads that we experienced only one other time in history, which is 2022... Diesel crack spreads for instance, are almost as large as the flat price of WTI."
5
Refiners with capacity capture the spread — the tradeable is long refiners rather than bottom-picking crude; VLO (at a fresh 52-week high, ~$268) is the named expression, and product-side positioning is not yet crowded (gasoline specs/commercials in the low 30s of their one-year range).
patrick-ceresna in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "Rather than trying to pick a bottom in crude, I'd rather continue to lean into the part of the value chain that is actually benefiting from that setup, and that is the refiners... Valero symbol VLO, which is trading at $268... has just broken to a fresh 52 week high and is clearly one of the strongest names in the refining space."
massil-begnan in 2026-07-02-podcast-macro-voices-macrovoices-539-rory-johnston-hormuz-crisis-is-it: "On the product side. Gasoline speculators and commercials are actually light low 30s on their one year range reading. So the crack sped strength isn't a maxed out speculative trade. There's still room to run."
**US refineries are effectively maxed** — anas-alhajji in 2026-07-16-podcast-macro-voices-macrovoices-541-dr-anas-alhajji-bab-el-mandeb-the: *"if you look at today's numbers, refineries, right now, **some refineries are running above 100% of their capacity**. And on average, for the U.S. refining sector, we are running at **96, 97%**. So where refineries are running at almost full capacity, even if there is massive demand for gasoline and diesel, **if you cannot process the crude, then you are not going to demand the crude**. And if you don't demand the crude, there is no reason for its prices to go up."* This is the chain's mechanism stated exactly: refining capacity, not crude supply, is the binding constraint, and it *decouples* product prices from crude.
**The shortage is in products, not crude** — anas-alhajji in 2026-07-16-podcast-macro-voices-macrovoices-541-dr-anas-alhajji-bab-el-mandeb-the: *"we do have plenty of crude in this case... most of the decreases were in the products, not in crude. Because... we as a human, we use petroleum products, we don't use crude oil."*
**Crude quality is the hidden constraint** — anas-alhajji in 2026-07-16-podcast-macro-voices-macrovoices-541-dr-anas-alhajji-bab-el-mandeb-the: *"What we need for diesel basically is medium sour crude. What we produce from shale is light sweet crude. So we can produce a lot of gasoline from it, but we cannot produce a lot of diesel."* Most of the crude lost from Hormuz was medium sour — so Asian refiners with spare capacity *"couldn't refine the diesel because they couldn't get the medium sour crude."* The bottleneck is refining capacity **matched to the right crude slate**, which is narrower than headline utilization implies.
**The diesel crisis had a policy amplifier** — anas-alhajji in 2026-07-16-podcast-macro-voices-macrovoices-541-dr-anas-alhajji-bab-el-mandeb-the: three Gulf refineries (Kuwait, Saudi, UAE) lost their export capability, and then *"because of the panic"* China halted product exports entirely, India imposed heavy taxation, and South Korea capped exports — *"these rules, because of the panic, exacerbated the situation."* Plus hoarding and tankers resold mid-voyage: *"we ended up with more ships on water at that time carrying the diesel and little diesel coming to the shores."*
**US refiners were the direct beneficiary** — anas-alhajji in 2026-07-16-podcast-macro-voices-macrovoices-541-dr-anas-alhajji-bab-el-mandeb-the: SPR medium-sour releases let US refiners cut medium-sour imports and *"refined more diesel and exported the diesel to the rest of the world. That's how we were able to increase our diesel exports to the highest on record."* And the counterfactual he puts on it: without the releases *"diesel prices in the United States probably would be in the range of $12 a gallon."*
**An unhedged structural gap** — anas-alhajji in 2026-07-16-podcast-macro-voices-macrovoices-541-dr-anas-alhajji-bab-el-mandeb-the: *"the biggest criticism to the idea of energy dominance [is] that whoever crafted this policy, they focused on upstream and they forgot the downstream... You need to expand U.S. refining capacity substantially."* No new capacity is coming inside this thesis's window.
**The forward scenario the hosts and Alhajji converge on** — Erik Townsend put it as crude staying comfortable while products dislocate; anas-alhajji in 2026-07-16-podcast-macro-voices-macrovoices-541-dr-anas-alhajji-bab-el-mandeb-the: *"That is absolutely the case. So we might end up with higher gasoline prices, higher diesel prices. Of course, if you look at jet fuel, for example, in Europe, prices already hit record high."*
⚠ **Counter-weight on duration, from the same source:** Alhajji thinks the big product move has largely *happened* — demand destruction begins at ~$160 and *"it already happened and it already passed them... it's very hard to see this happening again unless we see the Bab El Mandib or any other waterway... closed."* So the crack-capture thesis is, on his read, dependent on a *new* chokepoint event rather than the existing one. See war-risk-insurance-as-chokepoint-transmission.
What would falsify this
- Step 3: Middle East product loadings recover toward the pre-war ~5M bbl/d (Johnston's own stated repair condition) — cracks normalize toward ~$20.
- Step 3: Russian refined-product exports rebound to pre-strike levels, re-adding refined supply.
- Step 4: Diesel/gasoline crack spreads compress back below ~$30 without refiner equities having re-rated — the capture window closed before it was tradeable.
- Step 5: US product export restrictions are imposed — the mechanism's global-crack logic stops accruing to US refiners specifically.
Contradictions / tensions
- US refiner yield-swing is a self-correcting force: US refiners already showed exceptional flexibility (gasoline→jet swing during the crisis) and a swing back toward gasoline will 'ameliorate some of that tightness' (Johnston) — the crack blowout is partly self-limiting for gasoline specifically.
- Policy risk targets the beneficiary directly: Trump and Bessent are publicly talking 'price manipulation' by refiners, and US product export restrictions remain 'a wild card on the table' (Johnston) into the November midterms — an export ban would crush US refiner realizations even while global cracks stay wide.
- The crude-weakness leg (steps 1-2) rests on a temporary floating-storage drawdown and an unexplained Chinese absence; if China re-enters and the jailbreak peters out, crude firms and the crack spread compresses from the feedstock side.
Implications
- Long US refiners (VLO the named name; the crack-capture logic extends to MPC/PSX though the source names only Valero). Ceresna's defined-risk expression: VLO Aug 21 2026 270/300 bull call spread at $9.25 debit (~2:1 payoff at ≥$300).
- Avoid bottom-picking crude flat price: the same source argues crude downside is being cushioned by near-record spec shorts ($6-10/bbl normalization upside), but the *relative* trade is products/refining over crude while the bottleneck holds.
- Consumer read-through: pump prices stay elevated even as crude round-trips — 'gasoline and crude oil are two different commodities.' The fuel-cost squeeze on households (iran-fuel-shock-consumer-bifurcation) fades more slowly than the crude tape implies.
- Duration key: this closes when Middle East refineries and the ~5M bbl/d Hormuz product flow recover, or when Russia's refining recovers — watch product loadings out of the Gulf, not crude loadings.
Companies
Concepts
Open questions