Navigating the Refinery Downturn: Strategic Sectors to Watch in 2025

The U.S. EIA's latest data on refinery crude runs has sent shockwaves through the energy sector. A 328,000-barrel-per-day drop—the largest since the 2020 pandemic—highlights a confluence of seasonal maintenance, aging infrastructure, and global overcapacity. While this decline might seem alarming, history offers a roadmap for investors to identify opportunities in the chaos. By dissecting how the market has responded to similar downturns, we can pinpoint sectors poised to thrive in this new landscape.

Historical Patterns: Resilience in the Gulf, Vulnerability on the East Coast

The refining sector's geographic divide has long been a key determinant of performance. Gulf Coast refineries, with utilization rates near 93.5% as of July 2025, have consistently outperformed their East Coast counterparts, which hover around 59%. This disparity isn't just cyclical—it's structural. The Gulf's access to low-cost feedstock, modernized infrastructure, and strategic positioning for global crude flows (exacerbated by Red Sea shipping disruptions) make it a fortress of stability.

During the 2020 pandemic, Gulf Coast logistics firms like Kinder Morgan (KMI) and Magellan Midstream Partners (MMP) became safe havens. Their transportation and storage contracts insulated them from commodity price swings, delivering stable cash flows even as refiners struggled. Today, as seasonal maintenance and global overcapacity weigh on the sector, these infrastructure plays remain compelling.

Energy Services: The Retrofitting Renaissance

The energy transition isn't just a buzzword—it's a profit driver. During the Q1 2025 GDP contraction, energy services firms like Schlumberger (SLB) and Baker Hughes (BKR) saw surging demand for retrofitting services to meet low-carbon mandates. These companies aren't tied to refining margins; instead, they profit from the infrastructure upgrades required to decarbonize existing assets.

Investors should also eye the rise in biofuel compliance credit prices. The biomass-based diesel and ethanol RINs market has surged, reflecting regulatory and market pressures favoring renewable fuels. This trend suggests that companies involved in biofuel production or compliance credit trading could see outsized gains.

Petrochemicals: A Double-Edged Sword

The refining sector's decline has a direct impact on petrochemical feedstocks. Naphtha and other oils for petrochemical use have seen steady growth, but lower refinery utilization could tighten supplies. This creates a paradox: while petrochemicals benefit from increased feedstock availability, automakers and other downstream industries face higher fuel costs.

For example, during past utilization declines, automakers underperformed by ~0.8%, while energy services stocks rose by 1.2%. This shift in capital underscores the importance of hedging against refining volatility by investing in infrastructure and energy transition technologies.

The Hydrogen and Grid Infrastructure Play

As the refining sector contracts, hydrogen and grid infrastructure are emerging as critical areas. The IEA projects global energy transition investment to hit $3.3 trillion in 2025, with $1.5 trillion allocated to electricity infrastructure. Grid modernization is essential to manage the volatility of renewables, yet investment lags behind generation spending.

Companies like NextEra Energy (NEE) and Brookfield Renewable Partners (BEP) are already capitalizing on this gap. Meanwhile, hydrogen projects—though still nascent—could see a tenfold increase in investment by 2027 if current CCUS projects proceed.

Actionable Investment Advice

1. Prioritize Gulf Coast Infrastructure: Revisit logistics firms like Kinder Morgan and Magellan Midstream. Their stable cash flows and strategic positioning make them ideal during refining downturns.
2. Bet on Energy Services: Schlumberger and Baker Hughes are well-positioned to benefit from retrofitting and low-carbon mandates.
3. Diversify into Renewable Fuels: Companies involved in biofuel production or RINs trading could see regulatory tailwinds.
4. Grid and Hydrogen Infrastructure: NextEra Energy and Brookfield Renewable Partners offer exposure to the electricity sector's rapid expansion.

Conclusion

The current refinery downturn isn't a death knell for the sector—it's a catalyst for reallocation. By learning from historical patterns and focusing on infrastructure, energy services, and the energy transition, investors can turn this crisis into an opportunity. The key is to avoid overvalued refinery stocks and instead channel capital into the sectors that will define the next decade of energy.