Diesel is the fuel that powers the global transportation and industrial economy. From freight trucks and locomotives to construction and agricultural equipment, it is a critical input cost, and that cost has now surged toward historic highs. Prices are approaching levels that could trigger demand destruction, with potential ripple effects across the global economy.

While crude oil prices have moved higher, naturally lifting refined products like diesel and gasoline, the U.S. has not been insulated from the sharp spike in diesel prices. The key reason is persistently low distillate inventories over the past several years. This structural tightness has made diesel, along with other products reliant on heavier sour crude, especially vulnerable to a violent price shock—one we’ve only seen a couple of times historically.

On Friday, the April Heating Oil (/HO) futures contract—also known as NY Harbor ULSD (Ultra-Low Sulfur Diesel)—posted its highest weekly close on record, based on available data. Diesel production is typically derived from medium and heavy crude oils, which are currently facing global disruption due to the Iran conflict and the effective closure of the Strait of Hormuz. This has significantly impaired the flow of these crude types to global refineries.

Distillate fuel inventories in the U.S. have been tight for years and currently sit roughly 3% below the five-year average. Importantly, that five-year average still reflects elevated inventory levels from the COVID-19 period, meaning today’s baseline is arguably even tighter than it appears. At the same time, inventories continue to draw down without a clear mechanism to replenish supply. At current consumption levels, the market risks running into a material supply deficit without a resolution to these global disruptions.

At these elevated price levels, demand destruction becomes a real risk in the near term. Higher diesel costs directly impact a wide range of industries, many of which may struggle to absorb the increase. Companies may attempt to pass costs onto end consumers, fueling inflation, but this can also lead to delayed or canceled purchasing decisions, particularly for large durable goods.

Even energy equities—specifically refiners—could face downside risk despite the bullish backdrop in prices. This may seem counterintuitive, but current refining margins, as measured by the 3:2:1 crack spread, have historically proven unsustainable at elevated levels. This metric tracks the profitability of refining three barrels of crude into two barrels of gasoline and one barrel of diesel.

Historically, crack spreads above $45 tend to precede sharp reversals. While diesel prices and refining equities like Valero (VLO) often rise together during these spikes, margins eventually compress, and equity valuations can follow. These inflection points have also coincided with broader economic slowdowns, as cost pressures ripple through the system.

This dynamic may help explain why 1-year inflation swaps have repriced sharply higher and bond yields continue to move upward.

For now, energy bulls are firmly in control, and the sector has delivered a banner year. Given the unprecedented nature of current supply disruptions, the rally could extend further. However, history suggests that these types of parabolic moves tend to be short-lived—and when the turn comes, it can be sharp and spreads across multiple asset classes.

Tune in live from 8 a.m. to 5 p.m. ET, or anytime, anywhere, on‑demand.

Or stream it via thinkorswim® and thinkorswim Mobile, available through our broker-dealer affiliate, Charles Schwab & Co., Inc

Please do not reply to this email. Replies are not delivered to Schwab Network. For inquiries or comments, please email [email protected].

See how your information is protected with our privacy statement.  

This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any decisions.

Schwab Network is brought to you by Charles Schwab Media Productions Company (“CSMPC”). CSMPC is a subsidiary of The Charles Schwab Corporation and is not a financial advisor, registered investment advisor, broker-dealer, or futures commission merchant.

Charles Schwab Media Productions Company and all third parties mentioned are separate and unaffiliated, and are not responsible for one another's policies, services or opinions.

Data contained herein is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. All events and times listed are subject to change without notice.

1