Refinery Utilization Rates and Sector Rotation: Navigating Energy and Transportation Markets in 2025

The U.S. Energy Information Administration's (EIA) latest weekly refinery utilization rate of 95.40% as of July 2025 underscores a refining sector operating near full capacity. This figure, a marginal decline from the previous week's 95.50% but a sharp rise from 91.60% in the same period last year, highlights a fragmented landscape. While the Gulf Coast thrives at 93.5% utilization—bolstered by low-cost crude and export infrastructure—the East Coast lags at 59%, plagued by aging refineries and retrofit costs. This divergence creates a compelling case for sector rotation strategies between energy and transportation markets.

The Refinery-Airlines Nexus: A Tale of Two Sectors

Refinery utilization rates are a barometer for fuel demand, which directly impacts both the Oil & Gas sector and the Passenger Airline industry. When utilization is high, gasoline and jet fuel prices often rise, squeezing airline margins. Conversely, a decline in utilization can ease fuel costs, offering airlines a reprieve.

The EIA data reveals a 5.6% drop in refinery crude runs in July 2025, with throughput falling to 118,000 barrels per day (b/d) from June's 125,000 b/d. This reduction, driven by regional disparities and geopolitical pressures, signals a potential inflection point. For instance, Gulf Coast refineries—key suppliers to domestic and international markets—are maintaining high utilization, while East Coast refineries face margin erosion. This imbalance creates asymmetric opportunities for investors.

Tactical Opportunities in Energy and Transportation

1. Energy Sector: Gulf Coast Infrastructure and Industrial Equipment Plays
   The Gulf Coast's robust utilization rate of 93.5% supports demand for industrial equipment and maintenance services. Companies like Caterpillar (CAT) and 3M (MMM), which supply machinery and materials for refining operations, are well-positioned to benefit. Additionally, midstream infrastructure firms such as Kinder Morgan (KMI) and Magellan Midstream Partners (MMP), which manage crude transportation and storage, are expected to outperform due to fee-based revenue models tied to high throughput.

1. Transportation Sector: Airlines and Fuel Hedging Strategies
   The U.S. passenger airline industry's quarterly financial performance in Q1 2025—marked by a $225 million after-tax net loss and a $138 million pre-tax operating profit—reflects a fragile recovery. While domestic operations showed resilience, international routes remain vulnerable to fuel price volatility. A decline in refinery utilization could lower gasoline and jet fuel prices, improving airline margins. However, investors must remain cautious, as global factors like Red Sea shipping disruptions and OPEC+ output cuts continue to tighten crude flows.

1. Energy Transition and Diversification
   The EIA report also highlights the growing tension between traditional refining and renewable energy. California's planned 17% capacity reduction by 2026 and surging biomass-based diesel (D4) and ethanol (D6) RIN prices signal a shift toward cleaner fuels. Investors should consider diversifying portfolios to include biofuel innovators like Renewable Energy Group (REG) alongside legacy chemical producers such as LyondellBasell (LYB) and Dow (DOW).

Geopolitical and Macroeconomic Considerations

Sustained refinery underperformance could delay Federal Reserve rate hikes by easing gasoline price pressures. However, if the decline reflects broader economic weakness—as seen in Q1 2025's 0.3% GDP contraction—investors should prepare for policy shifts. Red Sea shipping disruptions and OPEC+ output cuts have further complicated the outlook, forcing underperforming East and West Coast refineries to pay premium feedstock prices. This margin erosion underscores the importance of hedging strategies in regions reliant on imported fuels.

Strategic Recommendations for Investors

• Rebalance Portfolios Toward High-Utilization Regions: Prioritize Gulf Coast infrastructure and industrial equipment plays (e.g., KMI, CAT) while hedging against fuel price volatility.
• Monitor Airline Margins and Fuel Costs: Allocate capital to airlines with strong fuel hedging programs and regional exposure to lower-cost fuel markets.
• Diversify Energy Exposure: Balance traditional refining stocks with renewable energy innovators to mitigate transition risks.

The energy and transportation sectors are at a crossroads, with refinery utilization rates serving as a critical signal for sector rotation. By aligning portfolios with high-utilization regions and hedging against fuel price swings, investors can navigate the current turbulence while capitalizing on long-term opportunities. The energy transition is no longer a distant horizon—it is a present-day reality, and those who adapt will thrive in an era of shifting industrial demand and sector-specific volatility.