American refineries are running at 98% utilization and 17 million barrels a day. US distillate inventories, on Paul Sankey's reading, are at the bottom of the tank and have never been lower.
The usual answer to a price like that is imported supply. Sankey's answer is that there is none to import: tanker rates are at record highs, Europe is short of refining capacity itself, and Russia — until recently the world's second-largest diesel exporter — has banned diesel exports.
"So, the answer fairly simply is there isn't any incremental supply, which is why the price is going exponential right now."
Sankey has covered energy markets for more than three decades, beginning at the International Energy Agency, and was ranked the number one oil and gas analyst by Institutional Investor for three consecutive years.
The full interview is covered here so you can skip it. 42 minutes of audio, 21 minutes of reading.
Here are the 12 calls that matter.
👤 Guest: Paul Sankey, lead analyst and President of Sankey Research, who has covered oil and gas for more than three decades and publishes institutional research on refiners and the majors
🎙️ Host: David Lin, a former BCA Research macroeconomics researcher who now runs The David Lin Report
📰 Published: 16 September 2026 on YouTube (The David Lin Report) · recorded 15 September 2026
🔴 YouTube | ⏱️ 42 min | ✅ Time saved: 21 min
Key Takeaways
US distillate inventories are at the lowest level ever observed, which is why diesel prices have gone exponential
Refiners are at 98% utilization and 17 million barrels a day, against 45% in Mexico
Harvest adds 200,000 barrels a day of diesel demand from buyers who cannot choose not to buy
The refiners physically have to shut down for maintenance soon, and doing it into empty tanks is the shock nobody is pricing
China sets a floor and a ceiling on oil: it buys below $80 Brent and he expects it to hesitate near $110
Its two marginal Middle East suppliers, Iran and Saudi Arabia, are both disrupted
Diesel is trading at $250 a barrel and appears in none of the inflation measures the Fed watches
Shelter dominates CPI and medical costs dominate PCE; neither includes diesel
Price elasticity has stopped working: jet fuel prices doubled in a year and jet demand rose 2%
A US product export ban is the risk the market is most afraid of, and he says it would cause havoc
Venezuela is a sideshow at about 1 million barrels a day, against 4 million to 5 million lost from Saudi Arabia
His trade is long oil to December 5 and out, because the seasonal buy point is already in the price
1. Hiking Into a Supply Shock
Lin opened on the day's tape: a new national record diesel price of $6.30 a gallon, crude above $100, a 10-year Treasury yield at its highest since 2007, and a Fed decision the following morning. His question was what happens to the economy when the Fed hikes into a supply shock.
The setup Lin read out is the frame for everything that follows: "Diesel prices have reached a new national record of $6.30 a gallon according to AAA. WTI is above $106 per barrel this morning and Brent crude is over $110 per barrel." He added that shipping through the Strait of Hormuz remains severely restricted, with data showing only four vessels transiting on Monday.
Sankey's answer starts with the supply chaos rather than the Fed. The first cause he named is Russia and Ukraine: the Trump administration's reported request that Ukraine stop bombing Russian refineries "didn't seem to last 24 hours," and the overnight attacks that followed became a major concern for a market already worried about Saudi Arabia.
The market did briefly price the truce. He said the announcement of the request made diesel "gap down a little bit on Monday yesterday" before the attacks resumed.
His description of where distillate inventories sit is the core claim of the interview. "But broadly speaking, we're probably at the level of tank bottoms for distillate in the US, which is why the price is just rising aggressively now because you're essentially out of marginal supply."
The demand side has a buyer who cannot say no: "You're essentially out of marginal supply and your farmers are going to be running an extra 200,000 barrels a day of diesel and they're locked in. They have to use it. They can't not harvest. So that's going to be a very inflationary impact at the margin."
2. The Saudi Outage
The supply story Sankey treats as the biggest single number is the East-West pipeline, which carries Saudi crude to the Red Sea and bypasses Hormuz.
Saudi Arabia is being attacked from two directions, and he named both. Shia militias in Iraq blew up the pump station on the East-West pipeline; the Houthis to the south are the Iranian-backed effort.
"That's going to cost 5 million barrels a day of oil right there." Initial Friday reports described flaring; by Monday the Saudis themselves confirmed the line was shut.
He set the loss against the size of the market later in the conversation. The world consumes roughly 100 million barrels a day, and by his count four to five million of Saudi supply has gone — four to five percent of the market, which is his explanation for the move in crude.
The one dovish item he flagged is diplomatic. The head of the UAE is said to have met the Iranian president, and he said not many people missed that aspect of the market.
On the repair timeline he set an analyst's estimate against a cabinet secretary's. Energy Secretary Chris Wright had said on CNBC that day that the Saudi outage would last only a few days; Sankey said, "Kepler's base case, as far as I can tell, from Kepler is 4 to 6 weeks."
His reason for the longer estimate is physical rather than technical: "And you've got to remember, it's an active war zone, right?" This is not being rebuilt in a safe environment, he said, and the situation is a disaster as regards attacks from both the Shia and the Houthis.
He was blunt about the pattern. He called the whole Hormuz situation almost deteriorating since February, and later summarized the supply picture as "So it's a mess out there I'm afraid."
3. The China Collar
Lin asked which is the bigger risk to oil: Hormuz, or China re-entering the import market. Sankey's framework is that China sets both ends of the range.
"I think we settled into this idea that there's now a collar on oil which is set by the Chinese." His reasoning is that China is the most important marginal buyer and that the price of oil is always set by demand.
The lower bound is a buying trigger. Once Brent goes much below $80 a barrel, he said, China starts buying more oil and potentially rebuilding the inventories it drew down this year — on top of the large stocks it built last year.
The upper bound is where the market now is: "The upper end of that band we had said we thought would be around 100 and now you're not far off. You might hit 110 today."
What is not resolved is whether China keeps buying at these levels. He said Chinese buying drove oil off the late-August lows by $10 to $15 a barrel before the Saudi outages and the Russia-Ukraine situation took over, and described China as "pregnant with the stuff they've already bought."
The reason he leans toward continued buying is China's own supply anxiety. Its two marginal Middle East suppliers are Iran, which the US has shut down, and Saudi Arabia, whose barrels now either cannot move or must go the long way through Suez, the Mediterranean, around Africa and up to China.
Meanwhile, US demand is holding up at record prices, and he attributed a lot of it, as a postulate, to AI capital spending. His market conclusion from that is mechanical — oil is rising as a share of GDP, oil in GDP correlates with oil in the S&P 500, and so the oil stocks outperform, which is generally not good for the rest of the market.
4. Record Tanker Rates
The freight market is the part of the story Sankey says is doing the most damage and getting the least attention.
"tanker rates are at absolutely all-time record highs. So, you'd have to say this is a highly inflationary environment."
The mechanism he described is that freight costs feed straight into the delivered price of crude. A lot of the arbitrages that make oil move — his example is the US Gulf Coast to northwest Europe — are heavily affected by the price of tankers, so a buyer has to pay a very high price to pull a barrel their way once freight is allowed for.
He put the cost of the conflict at more than the oil price alone: "High oil prices are inflationary. They also cost money in terms of the ongoing defense that we have to spend."
The seasonal point is what makes him bullish in the near term. Inventories normally have to be built into November, and both European natural gas and global diesel are short going into winter. "So, we're very bullish for the next two months."
5. What China Actually Holds
Lin cited a report putting China's stockpiles at between one and 1.4 billion barrels and asked whether that is accurate.
"It's about as accurate as you'll get." The reason it is not better is that much of China's strategic inventory is underground.
He explained how the estimate is produced, which is worth knowing when reading any of these numbers. Satellite trackers count the tankers arriving in China and then measure the floating lids on above-ground storage tanks to calculate how full they are.
The asymmetry with the United States is the part that matters for a trader. The US reports its inventory, and has run it down a lot; China does not report.
His read on why China behaves this way is political, not commercial. He described the Communist Party as an existential party whose first objective is to continue existing. "And I think they feel very threatened by oil."
The Chinese, he said, "hate to be dependent on anything outside China," and their clearest dependency is oil and gas. That is why he thinks they will build and use inventory aggressively, and why the collar argument works.
6. Bottom of the Tank
Lin asked at what level material demand destruction actually starts. Sankey's answer was that the headline Brent price is hiding how tight the physical market already is.
The record he reached for is not a Brent print: "Well, earlier in the year, Oman priced the all-time high mark crude price ever reported, which is $166 a barrel." His point is that people look at the headline and miss the action underneath it.
"And a good example today is Shanghai oil is trading a good $10 above Brent." He said that premium could itself cause the Chinese to back off, although their supply worry cuts the other way.
His rule for reading the market is a line worth keeping: "we always say the only good number in the oil market is the oil price." Physical markers like dated Brent, Oman and the Shanghai prices are all trading well above Brent, which he says implies a very tight market as the world tries to build inventory into winter.
On US distillate stocks he was categorical. "It's as low as it's ever been on an observed basis," and the only way to know how low inventories can go is to look at observed history. "We have never been lower."
Lin's figures alongside that: average diesel prices passed $6 a gallon for the first time, the highest in US history, with inventories 13% below the five-year average by some reports.
7. Refineries at 98%
The utilization number is where Sankey's admiration for the industry and his warning about it sit in the same paragraph.
"98% utilization and 17 million barrels a day of capacity. That's incredible industrial performance from the US refiners." He said you have to tip your hat to them.
The comparison makes the point: "Mexico's refining system runs at 45% utilization." Russia, he said, might not even be at 50% right now.
"And so you've got these US mega refineries running at 97% utilization at $100 a barrel margin. It's a phenomenal effort."
Then the warning: "But there's only really one way that number can go, right? And that's been our concern." No hurricanes so far and a possible warm winter are the two things that could help.
The physical constraint is maintenance. Refineries cannot keep running that fast; this is normally when they turn down for turnaround season, and instead they are running off the edge of the cliff.
"So, at some point, some of these guys have to turn around and if they don't, there'll be a risk of an accident." With inventories as low as they are, an accident would be another massive upside to diesel prices — a shock he says is still out there as a possibility.
"The cavalry, I think, is going to be Chinese exports of products," and it is late. Chinese refiners have only just started buying Middle East crude to run harder, which means another fifty days or so before the oil reaches a Chinese refinery and a decision is made on whether to export the product.
The seasonal trade he normally runs is the opposite of what he is doing now. Normally he would sell oil around Labor Day and buy it at the first snow in New York, a date he puts at December 5 and says has actually been the first snow at least four or five times in twenty years of saying it.
"This year, I think what you do is you long oil from here through to December the 5th," and then sell. On the equities: "I expect the oils to continue outperforming versus the S&P for a good six or seven more weeks here and then we'll take another look."
8. The Export-Ban Risk
Lin raised a Reuters report that the White House is weighing whether to use the Defense Production Act to expand US refining capacity.
The specific measure Sankey has heard discussed is a restart of Valero's Benicia refinery in California. He noted that Valero capitulated on it only in the last year, for reasons that had nothing to do with the current crisis — it was simply a bad economic place to operate, and in his view California has caused a lot of its own problems.
The measure the market is actually afraid of is a ban on oil product exports, which came up on the wires that day. It would crater domestic gasoline and diesel prices and cause havoc globally and in oil markets.
His position is that the price should be paid rather than suppressed: "I think we should be paying a fair price for oil and eating the cost of it, the true cost of it as opposed to trying to interfere in the market."
"Every time in history that you've interfered this aggressively in markets, it doesn't end well."
He was equally clear about why it might happen anyway. Heading into the midterms, oil prices, Iran and inflation are the three things he thinks voters are most focused on, and all of them would be tempered by lower pump prices. "I really hope they don't do it. I think it's a bad idea, but it's definitely a risk that the market's worried about."
He said Valero's stock was trading off earlier in the day on the export-ban idea and had recovered by the time he spoke.
On who is arguing what inside the administration, he named the Interior Secretary and the Energy Secretary as opponents of a ban, and said Chevron has the president's ear too. His account of the industry's message to the president is that free enterprise made the US the world's largest oil and gas producer and exporter, which has been huge for the dollar and the economy, and interfering will kill it.
His verdict on the campaign slogan is unsparing: the "Drill, baby, drill, lower oil prices" pairing was, in his words, "such a nonsensical construct." Nobody drills more because a politician talks the price down.
He also gave an example of the Energy Secretary getting a fact wrong early in the crisis. Wright said a tanker had crossed Hormuz; Sankey checked with Javier Blas at Bloomberg, who told him it was an Iranian tanker.
9. Venezuela Is a Sideshow
Lin brought up a Kalshi prediction market on which company will sign a Venezuelan oil agreement, with Shell in the lead at 62%.
Sankey's first point was about the contract wording rather than the odds. What counts as a "Venezuelan oil agreement" depends on the small print — a binding agreement granting an enforceable upstream crude oil economic participation right before January.
He thinks the odds are roughly right, and he would trade the spread: "I would probably be long shell short exon right there." His reason for shorting Exxon is legal, not commercial.
Exxon and ConocoPhillips hold the major legal cases against Venezuela, and he has covered Exxon for 25 to 30 years: "those guys don't back off their legal position." International arbitration found the expropriation illegal and awarded them multi-billion-dollar payments, which he said the president swept away in the White House Venezuela meeting.
His line on Exxon's patience is the sharpest thing in the section: they will "wait for the Democrats if that's what it takes." ConocoPhillips is owed more, and he said Ryan Lance is not going to back down either.
He also floated the structural version of the fix: Chevron buying ConocoPhillips would make the Conoco legal settlement go away.
On the barrels, Venezuela does not move the market. "The Venezuela is more of the order of 1 million barrels a day, right?" Production went from about half a million barrels a day at the lows toward 1.2 million and can add roughly 50,000 barrels a day incrementally for several months, perhaps reaching 2 million.
It also competes directly with Canadian heavy crude, so refiners simply buy less Canadian barrel-for-barrel. Net, he said, it does not make much difference to the market.
The same day brought a loss of similar size in the other direction. Libya declared force majeure on its deliveries: "So right there suddenly you've lost a million barrels a day that you forgot was a problem."
10. Nowhere to Import From
Lin's question was simple: if the US needs more diesel, where does it come from?
The answer is that it cannot be priced in at all, because it cannot be imported. Tanker rates are too high and nobody else has any spare.
He went around the world by way of elimination. There is some hope that the new Dangote refinery in Nigeria performs well; the Middle Eastern refiners have a problem; Russia has a problem; "Europe is structurally short refining capacity."
Buying it would mean bidding against Europe, which he said the US will not do. Hence the section's conclusion: there is no incremental supply, which is why the price is going exponential.
He pointed at the futures curve as confirmation: heating oil, which is essentially distillate and essentially diesel, has been leading crude as the market squeezes.
The incremental problem he raised unprompted is European gas. Europe is due to stop importing Russian LNG on January 1, 2027 — two and a half months away, on his count — cutting off roughly 15 million tons a year.
His reason it will happen is that Europe is rearming. Defense spending and militaries are growing, it is a war situation on the front lines in Scandinavia and Ukraine, and Europe wants the gas cut off. That 15-million-ton hole implies still more tightness in diesel.
11. Elasticity Isn't Working
Asked where diesel goes into winter without more supply, Sankey's answer was that the usual braking mechanism is not engaging.
The clearest evidence is jet fuel. "The most remarkable is really jet fuel where you've had you know 100% increase in jet fuel prices over the past year. Jet demand is up 2%."
"The higher the gas the higher the jet price the more people fly." He said behavioral analysis backs it up: people increasingly treat flying and travel as a staple of the experience economy, and travel is treated as non-negotiable.
The distributional consequence is one he stated plainly. High gasoline and diesel prices work as a regressive tax: "It's disproportionately bad for poor people." The rich keep getting richer because the market and the economy are being inflated.
Gasoline and diesel demand have not reacted much either, which is why he thinks prices have to go a lot higher.
The other source of inelastic demand is the AI build-out, and the link is physical. Data-center construction needs diesel for backup generation. "All the generation equipment being built needs diesel," and the builders will spend the money regardless of the price of running the truck.
His level for the product itself: "And what we keep saying to you is diesel is $250 a barrel." He added that it is rising every day and called the situation crazy.
On where demand destruction actually sits, he anchored on gasoline at $4.50 a gallon historically as the point where demand steps down. "So that's another 20% higher on gasoline," which he said fits with roughly $120 to $130 a barrel of Brent. "So you'd argue that you can go 20% higher but not a lot more."
The trade that falls out of it is the refiners, with a caveat. Even with Valero near $400 a share, "It's very bullish for the likes of Valero." The problem, he said, is that "They're going to make too much money," which invites Washington to get at the cash pile or ban exports.
His defense of the refiners is a point about capital discipline: "And you've got to remind people that's because they stuck with refining when everyone else gave up." People kept driving and flying while the refineries were shut.
12. Diesel Isn't in the CPI
Lin's closing question was how monetary policy evolves if Brent goes another 20% higher and demand destruction starts at the same time.
Sankey said he had ground through the components of CPI, PPI and PCE for a note over the weekend on the diesel impact on inflation. "A lot of these measures that they use PCE CPI are very lagging."
His specific objection is what dominates each index. CPI is levered to shelter costs, which he called a dodgy sum that does not make sense in the way it is worked out; PCE is heavily weighted to medical expenses — "but none of them really include diesel."
The gap between that and the commentary is his point: "So when I hear Wall Street economists for example if I go on CNBC or Bloomberg and I hear people talking about the Fed and interest rates and everything else I really rarely hear if ever them talk about diesel prices."
"I mean it's a major crisis and it's really out of inventory," and he said it has upside leverage of at least another 20% to 30% in a cold winter.
He expects significant inflation worries under the hood, pointing at the previous week's PPI print, and said the Wall Street read on the Treasury Secretary and the Fed chair is not good right now. "I think people, you know, the market, the bond vigilantes are clearly worried, right?"
The scenario he raised for the next day's decision is the one nobody was positioned for: with the midterms coming, the Fed shocks the market and does not raise. He said whether the market would take that negatively would be interesting to watch.
He closed the macro thread by tying diesel back to growth. The global economy runs on diesel, and his concern is a demand-destruction recession caused by the lack and cost of energy supply.
Bonus Insights
Lin raised the year's freight trade: the Breakwave Tanker Shipping ETF, which he said was "up 3,600% year to date" and which holds nothing but freight futures one to six months forward. Sankey had not looked at that fund, and on his own screens the spike in tanker rates looks larger than the fund's chart implies.
His description of how tanker rates are set is the most quotable aside in the interview: they are "set by a conversation." A broker and a shipowner agree a price between themselves, then a price reporting agency calls and asks what it is. He called the series a bit dodgy and the subject arcane, but said rates are "definitely spiking to unprecedented levels."
The tanker economics he relayed explain why the gas trade is different from the oil trade. A very large crude carrier would cost about $60 million to $70 million to replace and take three years to build; an LNG tanker is roughly five times that, at about $250 million, and "carries a quarter of the energy."
Which is why nobody risks an LNG tanker — and why one incident stood out. "You cannot blow up liquid gas." But it can be damaged: "And there was one damaged by a Ukrainian drone, which was one of the craziest stories of this crisis." A sanctioned Russian LNG carrier heading for Suez was hit by a waterborne drone, which by all accounts was fired from Libya, burned, and drifted around the Mediterranean for weeks.
His broader worry from that episode is structural: drone warfare has revealed how vulnerable ships and refineries are, and how dependent the world is on them. He does not expect the kinetic war to calm down.
Asked whether Russia can export more oil, his answer was two words: "They can't." Russia is struggling with internal needs, Ukraine is causing havoc in its oil system, and Russia — formerly the world's second-largest diesel exporter — has banned diesel exports, which he called a huge contributor to the current crisis.
On where China's barrels come from, Russia is the base-load supplier through pipes and tankers, while the marginal barrel comes from Iran and Saudi Arabia. "China is the world's largest oil importer," at a normalized 13 million barrels a day, and he wrote a note around the Trump visit deriving that its marginal barrel comes from Iran — which is why he thinks the US shutdown of Iranian exports has hurt China more than people realize.
His conclusion on Chinese buying, with the appropriate hedge: "So I think there's going to be a lot of concern in China right now with what's going on in terms of the security of their oil supply which is why I'm not sure they're going to stop buying oil at $107 a barrel." He added the trader's caveat that in oil, as soon as you make a prediction the opposite happens. "But that's my best guess at this moment."
He also noted the all-time high for the oil market itself: consumption reached 108 million barrels a day in February 2026, which he suspects may stand as the peak given the supply losses since.
Sankey's bottom line is that this is a physical shortage rather than a price spike: the United States has no spare refining capacity, no spare distillate inventory and no import route, and the inflation measures the Fed is setting policy from do not contain the price that is moving.
Products, Companies & Tools Mentioned
Sankey Research (His own firm: an institutional written product for fund managers and corporates, plus a YouTube channel he updates roughly weekly)
Valero (The refiner he is most bullish on, near $400 a share; its shuttered Benicia refinery in California is the one the Defense Production Act might restart)
Chevron, Exxon Mobil, ConocoPhillips and Shell (The Venezuela trade: long Shell, short Exxon, because Exxon and ConocoPhillips will not drop their arbitration claims)
Dangote Refinery (The new Nigerian refinery he says is one of the few sources of hope for incremental product supply)
Breakwave Tanker Shipping ETF (The freight fund Lin raised, which holds only one-to-six-month freight futures)
Kpler (The cargo-tracking firm whose 4-to-6-week base case for the Saudi outage he set against the Energy Secretary's "few days")
Kalshi (The prediction market pricing which major signs a Venezuelan oil agreement first)
Books & Resources Mentioned
Sankey Research's written product and YouTube channel (Where he publishes the institutional notes referenced through the interview, including the weekend note on diesel and inflation)
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