A Christmas Stress Test: Why Diesel Pricing Stress Means Profits

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. This surge usually drives up freight volumes (the amount of goods moving) and fuel demand simultaneously. However, the 2025 holiday season produced a rare and confusing anomaly that has left many investors scratching their heads.

While freight volumes remained relatively soft, indicating that consumers and businesses are spending cautiously, the price of diesel fuel surged. This creates a disconnect in the fundamental laws of supply and demand. Usually, weak demand leads to lower fuel prices. Instead, the cost of moving goods is rising even as the volume of goods moving slows.

For general industrial stocks like FedEx (NYSE: FDX) or retailers like Amazon (NASDAQ: AMZN), this is a distinct warning sign. It suggests higher operating costs and lower profit margins heading into the first quarter of 2026. If it costs more to move fewer products, earnings will suffer.

However, for the companies that manufacture the fuel, this dynamic signals a massive profit windfall. Valero Energy (NYSE: VLO) and Phillips 66 (NYSE: PSX) are uniquely positioned to benefit from this diesel disconnect. While the broader economy worries about sticky inflation and logistics costs, these refiners are capitalizing on a market that is structurally short on supply.

The December Crack Back and the Diesel Margin Surge

To understand why these stocks are rising, investors must understand the crack spread. This financial metric represents the difference between the purchase price of crude oil and the selling price of refined products like diesel. It is, essentially, the refiner's gross profit margin.

In the fourth quarter of 2025, markets witnessed a phenomenon that traders are calling the December Crack Back. Margins for Ultra-Low Sulfur Diesel (ULSD) in the New York Harbor market skyrocketed, hitting approximately $49 per barrel in late December—more than doubling from the low $20s seen just months prior in October.

This price spike is not driven by booming economic demand; it is driven by a supply shock. Three main factors are currently colliding to keep prices high:

• Geopolitics: Tightened sanctions on Russian oil companies such as Rosneft and Lukoil in late 2025 effectively removed a significant volume of diesel from the global export market.
• Winter Weather: Diesel fuel and home heating oil are chemically very similar. A cold snap in late 2025 increased demand for heating oil, drawing down the same inventories needed for trucking.
• Capacity Cuts: Domestic refiners have permanently closed facilities to reduce costs, leaving the market with fewer barrels to go around.

For the general economy, high fuel prices during a freight recession increase the risk of a hard landing in 2026. However, for the refining sector, this supply shortage creates a high profit floor. Even if fewer trucks are on the road, the profit earned on every gallon of diesel sold remains historically high.

Valero Energy: The Operational Powerhouse

If the market is short on diesel, the company with the most functioning capacity stands to win the most.

Valero Energy has emerged as the clear operator's choice in this environment. The stock has outperformed the broader energy sector, gaining approximately 35% year-to-date.

Valero’s strategy is simple: operational excellence. While competitors have struggled with complicated restructurings, Valero has focused on running its machinery as efficiently as possible. In the third quarter of 2025, the company reported earnings per share (EPS) of $3.66, beating analyst expectations.

The key to Valero’s success is utilization. Their refineries have been running at near 97% capacity. In a market where margins are $49 per barrel, keeping utilization high translates directly into massive free cash flow.

Furthermore, Valero isn't just relying on old-school oil. The company is a leader in the transition to green energy through Diamond Green Diesel (DGD), its joint venture with Darling Ingredients. The expansion at their Port Arthur facility, completed earlier in 2025, allows them to produce Sustainable Aviation Fuel (SAF). This creates a diversified revenue stream that appeals to investors looking for longevity. Valero captures the immediate upside of the diesel shortage while maintaining a foothold in the future of energy.

Phillips 66: The Architect of the Squeeze

While Valero profits from running hard, Phillips 66 is generating value by actively reshaping the market. In fact, Phillips 66 is partially responsible for the current high margins enjoyed by the entire industry.

In October 2025, Phillips 66 officially ceased crude processing at its Los Angeles Refinery (Wilmington/Carson). This move removed approximately 139,000 barrels per day of supply from the West Coast market. By taking this supply offline, Phillips 66 tightened the local market, driving up prices for the fuel produced by its remaining assets.

This aggressive decision-making is primarily driven by pressure from activist investor Elliott Investment Management, which has pushed the company to improve performance. In response, Phillips 66 launched the Streamline 66 initiative, a plan designed to cut costs and enhance shareholder returns.

The company has successfully executed this strategy, exceeding its $3 billion asset divestiture goal by late 2025, including the sale of its stake in a Swiss retail business and various pipeline assets.

Investment firm Raymond James maintained an Outperform rating on the stock in late December, citing the success of these self-help measures. For investors, Phillips 66 is a strategic play. It offers value through cost-cutting, share buybacks, and a more efficient portfolio, rather than just raw production volume.

2026 Outlook: How to Position Your Portfolio

The 2025 Christmas Stress Test has clarified the investment landscape for the new year. The global economy is facing a structural shortage of diesel refining capacity. This shortage insulates refiners from the economic headwinds that might hurt other industrial sectors.

Investors looking to trade this disconnect have two clear paths:

• The Offensive Play: Valero Energy is the vehicle for immediate exposure to high profit margins. Their high utilization rates and established renewable diesel operations make them the primary beneficiary of the current price environment.
• The Strategic Play: Phillips 66 offers a compelling narrative of restructuring. By closing high-cost assets like the LA refinery and satisfying activist demands, they are unlocking value on the balance sheet rather than just the income statement.

As we move into 2026, the data indicates that while the cost of shipping goods may remain a burden for the economy, the companies producing the fuel remain a bright spot for portfolios.

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The article "A Christmas Stress Test: Why Diesel Pricing Stress Means Profits" first appeared on MarketBeat.