Ballistic crack spreads... Refiners have more upside... Incentives matter... The bond market's riot... The Treasury sprays tear gas... Inflation and rates: higher for longer...
You've heard a lot from me (Dan Ferris) this year about oil refiners...
In December, I warned Ferris Report subscribers about a diesel-fuel supply shock due to declining U.S. refinery capacity. I recommended they buy two oil-refinery stocks: Marathon Petroleum (MPC) and Valero Energy (VLO).
As of yesterday's close, Marathon is up 118% and Valero is up 110%.
That's two doubles in eight months.
Both companies had already done well in 2025, but their profits really shot up after the U.S. and Israel began bombing Iran, which quickly shut down the Strait of Hormuz. My thesis for these companies didn't rely on a war in Iran... But it was apparent that the market was fragile, and Iran proved it.
You measure refinery profitability by the 3-2-1 crack spread. That's the price of two barrels of gasoline plus one barrel of diesel fuel, minus the cost of three barrels of crude oil that created them.
The 3-2-1 crack spread has gone absolutely ballistic this year.
We measure that using the Bloomberg Nymex WTI Cushing Crude Oil First Month 3-2-1 Crack Spread. As you can see, we've never seen anything like this...
The overall long-term pattern shows spreads relatively stable until the housing-bubble/financial-crisis era of 2005 to 2009. They surged to a generally higher level from roughly 2010 to 2019... and then to a higher level still from 2020 to the present...
Overall, it looks like a long-term bull market in refinery profitability.
There's plenty of volatility in the chart, to be sure. Spreads collapsed from about $30 per barrel of oil ("bbl") to just $1.99/bbl in the housing-bubble/financial-crisis era.
But the long-term trend is clear: a general rise culminating in today's ballistic run.
I've been amazed by the way the crack spread has kept soaring, but the work I've done suggests it'll be quite high for a long time...
That's because refiners will need greater incentives to build new refineries. The giants like Marathon, Valero, ExxonMobil (XOM), Chevron (CVX), and a few others might expand existing capacity, as they've been doing for years...
But we're not going to make a big dent in new refinery supply unless crack spreads stay in historically high territory for longer.
Just take the two refiners I've recommended in The Ferris Report, Marathon and Valero. Over the past 10 years, their returns on equity have averaged 18% to 21%. That's good, but not great. And their returns on invested capital have averaged an anemic 8.9% to 10.9%.
I suspect both numbers will be higher in the current quarter, since crack spreads have been much higher. But if they don't stay at this level, refiners have no incentive to build new facilities.
As portfolio manager and Stansberry Investor Hour guest Harris "Kuppy" Kupperman said in a recent X post on this topic:
Why is no one adding capacity?? Because until 6 months ago, returns on capital were single digits. The share prices are still well below replacement cost. Why add capacity when you can do buybacks at a lower cost per bbl of capacity?? Wake me when these things trade at 1.5x or 2x capacity ($45k -$60k per bbl of capacity) and then maybe supply comes. That's still a long way away.
It's a bit technical, I know. He's saying refiners' stocks are worth less than it would cost them to replace their assets. So it makes more sense for them to buy back shares than to build new assets... especially in a country like the U.S., where regulators seem to hate refineries.
So despite their ballistic run, it's not time to sell the refiners. Oh sure, they'll be volatile. They'll swing up and down every time President Donald Trump posts on Truth Social... and with every announcement about a "deal" with Iran.
But the share prices will eventually get past the headlines to the underlying reality: Before refiners have the economic incentive to add capacity, share prices must still rise a lot.
Without that new incentive, fuel prices and crack spreads can only rise. We need gas and diesel to run the modern world. We'll be using them both for a long time.
This is one of two seemingly unrelated trends that I've been tracking...
First, despite Ukraine bombing Russian refineries... a war in the Middle East that has shut down the Strait of Hormuz... and all-time-high crack spreads... there's still no economic incentive to build new refinery capacity.
Meanwhile, the Federal Reserve has cut interest rates six times in the past two years.
Rate cuts are supposed to make investing in all kinds of things more attractive. You'd think it would make investing in new refineries more attractive, too. But according to the U.S. Energy Information Administration, the U.S. has actually lost nearly 370,000 barrels per day of refining capacity in the past two years.
In other words, physical reality is on its own schedule and has its own rules. It does what it does, and that's not necessarily what you plan or expect.
As crack spreads were showing us that you can't shut down refineries without consequences... the bond market showed us that the Fed doesn't control it.
Pressure has been building in the bond market for a couple years...
The trouble started a little more than a year after the Fed completed an unprecedented hiking cycle. From March 2022 to July 2023, the upper bound of the federal-funds rate jumped from 0.25% to 5.5%.
There it stayed until September 2024, when the Fed cut rates by 50 basis points (half a percentage point). It cut them twice more, once in November and once in December, each time by 25 basis points.
During that same period, the 30-year U.S. Treasury yield rose from about 3.9% to just shy of 5%. It corrected a bit, then surged higher, to more than 5% in May 2025 for the first time in two years. (When bond yields rise, bond prices fall.)
The 30-year yield moved lower until the Fed cut rates three more times in September, October, and December of last year. Then the yield turned back higher and hit a new 19-year high of 5.3% on Monday, August 17.
(We've seen some chatter correctly pointing out that the 10-year Treasury is a more useful benchmark than the 30-year... Even so, the 10-year made similar moves.)
This is a classic bond market riot, which I've been warning Ferris Report subscribers about since Trump took office. Sellers are stampeding out of bonds, pushing interest rates higher, in protest against inflation.
The riot had finally become impossible to ignore, so on Wednesday, the Treasury Department fired financial tear-gas canisters into the melee.
The agency announced that it'll double its purchases of U.S. long-term Treasury bonds (targeting 10- to 30-year maturities) from a maximum $2 billion per operation to $4 billion per operation starting September 9. The official announcement said:
This increase in buyback operation sizes reflects Treasury's desire to provide greater liquidity support in longer-dated nominal sectors...
"Provide greater liquidity" means "we're panicking and trying to support prices to push yields lower."
Bond yields fell on Wednesday. Then the smoke cleared, and they were right back up on Thursday. It was like the announcement never happened.
Let's sum up what has been going on...
The Fed cut rates, which means the central bank thought the economy was moving too slowly and needed a shot of wake-up juice.
Then, fearing inflation more than a slowing economy, the bond market responded by selling long-term Treasurys.
The bond market riot got too hot, and the Treasury intervened.
The market believed the government was in charge for about one day... and is now back to telling the Treasury to go to hell.
Inflation is brutal for fixed-income investing like bonds. If investors can't get enough yield to comfortably beat inflation, they're not buying.
And bond investors know that inflation has been in a new, higher-for-longer era since 2021. That's five years of inflation refusing to return to its prepandemic regime of mostly staying below 2%.
The Fed has long targeted inflation of 2%, based on the core personal consumption expenditures ("PCE") index. Sometimes, they let it run hotter than 2%... In other words, central bankers actually believe they can make inflation go up and down however much they want, whenever they want.
The market has also shown that it doesn't care about the Fed's targeting...
At first, the Fed said elevated inflation was "transitory," meaning it wasn't worried about it. Eventually, it started hiking rates aggressively, saying it wanted to tame inflation. Then it started admitting it doesn't control things so much and that inflation would probably stay higher for longer.
The Fed keeps using rhetoric that implies its people are in control and know what they're doing, despite having clearly given in to the market's control of the situation.
The bond market doesn't care about the Fed. And refiners don't care about investing in new capacity without a proper incentive. It's why political consultant and author James Carville has said he'd like to be reincarnated as the bond market so he could intimidate anybody.
A glance at the core PCE inflation rate since December 2008 tells you everything. The red line is at 2%, the Fed's long-standing inflation target. The black line shows how rarely the Fed hits that target...
Inflation stayed mostly below 2% for years. Then, to make up for shutting down the economy during the pandemic, the government printed tons of money. And inflation skyrocketed.
Even after it peaked, the data shows clearly that inflation had entered a new higher-for-longer era. The post-2021 era's lowest core PCE inflation reading was 2.6% in April 2025. It has been rising steadily again all year, currently at about 3.3%.
That's why the bond market rioted when the Fed cut rates.
The Fed's target has always been meaningless...
Its belief that it could "allow" inflation to go higher is laughable. It doesn't allow the market to do anything. The Fed reacts to the market, not vice versa.
I'm not a doomer on the U.S. economy. But I am a realist.
And the economy faces a physical reality: Modern life relies on refined gasoline and diesel. And mere finance can't fix it. The Fed could hold interest rates at 0% for 20 years, and the Treasury could quadruple its bond buying... and you'd still never see a new refinery built.
To get that done, we'd have to change the way we think about the essential products that make our daily lives possible. We'd have to change the stringent environmental laws that prevent us from building new capacity and running it profitably.
And, again, refiners' stock would have to rise enough that capital investments become more worthwhile than share buybacks.
The limits of what finance can achieve came to a head with Wednesday's Treasury announcement.
Sooner or later, folks recognize that you've spent too much and borrowed too much... and you can't fix it by printing money and running ever-larger operations in the bond market.
No political, economic, or financial legerdemain will increase America's supply of refined petroleum products without somebody building more refining capacity...
And as we've shown, the market hasn't signaled for that yet.
What's next for the bond market? Will the Treasury succeed in keeping long-term rates lower when it starts buying back twice as many long-term bonds on September 9? I have a feeling the market's verdict will be rendered swiftly, but you never know. We'll have to wait and see.
No matter what else you might believe about investing, don't fight this core truth: The markets work, and they have the final say.
The physical world and the financial world are both telling us that in different ways this year.
Keep your ears open.
The market will have a lot more to say about both.
New 52-week highs (as of 8/20/26): BHP Group (BHP), Alpha Architect 1-3 Month Box Fund (BOXX), Maplebear (CART), EOG Resources (EOG), Equinor (EQNR), Global X MSCI Greece Fund (GREK), Illumina (ILMN), IQVIA (IQV), Coca-Cola (KO), LandBridge (LB), USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI), SSR Mining (SSRM), and State Street Energy Select Sector SPDR Fund (XLE).
In today's mailbag, feedback on yesterday's Digest, which also discussed the Treasury's bond-buyback plans and the market's reaction... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Corey, In Thursday's Digest you stated that on Wednesday Treasury Secretary Scott Bessent plans to double the pace of bond buybacks to $4 billion at a time which sent 10 yr. treasuries prices surging and yields lower – exactly what was intended. But today [Thursday], yields moved higher and essentially erased yesterday's action.
"This is all true, but there's another side of the coin (literally) that's flying under the radar, and that's the U.S. Dollar.
"Remember that one of the Trump administration's goals is to weaken our currency to make us more competitive in global market trading. At the time of this writing according to U.S. Settle FOREX market, the dollar is down 1.28% in less than a week of which 0.88% is made up in less than the last two trading sessions coinciding with the Treasury Dept. stated plans.
"So one way or the other I think they're achieving their objectives through the additional effect of weakening our currency." – Flex Alliance Member Kenneth S.
Good investing,
Dan Ferris
Medford, Oregon
August 21, 2026
