Refinery Utilization and Sector Rotation: Energy's Waning Momentum and Airlines' Ascent

The U.S. Energy Information Administration's (EIA) weekly refinery utilization rate has long served as a barometer for the health of the energy sector. As of July 25, 2025, the rate stood at 95.4%, a figure that would historically signal robust demand for refined products and a bullish outlook for oil and gas equities. Yet, this high utilization now masks a critical inflection point: the decoupling of refining activity from profitability. For investors, this divergence offers a stark warning about sector rotation dynamics and the shifting tides of capital allocation.

The Paradox of High Utilization

Refineries operating near full capacity typically correlate with strong refining margins, as measured by gasoline and diesel crack spreads. However, in 2025, this relationship has collapsed. The U.S. gasoline futures crack spread fell below $11 in December 2024, while the ultra-low sulfur diesel spread dipped under $22—a 40% decline from 2023 levels. This paradox—high utilization but weak margins—reflects structural shifts in demand. Electric vehicle adoption now accounts for 18% of U.S. auto sales, eroding gasoline consumption. Meanwhile, global crude supply constraints, including Red Sea shipping disruptions and OPEC+ output cuts, have created a volatile environment where refiners cannot pass through rising costs.

Historically, a 0.67 correlation existed between quarterly utilization rates and energy sector performance. Utilization above 92% typically preceded 6–8% sector outperformance. But this link has frayed in 2025. Despite utilization peaking at 93.3% in August 2025, the S&P 500 Energy Index has underperformed the broader market by 12% year-to-date, while airline ETFs like the iShares U.S. Airlines ETF (IAA) have outperformed. This inversion underscores a broader capital reallocation from legacy energy infrastructure to energy transition plays.

Airlines: Beneficiaries of the Energy Transition

While refiners grapple with margin compression, airlines have emerged as unexpected winners. Delta Air Lines (DAL) and United Airlines (UAL) have leveraged stable fuel prices and aggressive hedging to improve net margins by 4–6 percentage points in 2025. United's $1.5 billion investment in sustainable aviation fuel (SAF) infrastructure further positions it as a leader in the green energy transition.

The inverse relationship between refinery utilization and airline performance has sharpened in recent years. When utilization rates fall below 88%, energy sectors historically underperform while airlines outperform. This pattern has intensified as refiners reallocate capital to hydrogen and biofuel projects, boosting demand for industrial retrofitting firms like Caterpillar (CAT) and 3M (MMM). Investors are increasingly advised to underweight traditional refiners (e.g., Valero (VLO), Phillips 66 (PSX)) and overweight energy transition beneficiaries.

Macroeconomic Tailwinds and Policy Risks

The Federal Reserve's projected 150-basis-point rate cuts through 2026 will ease borrowing costs, but the broader macroeconomic landscape remains complex. OPEC+ supply discipline and geopolitical tensions (e.g., Red Sea shipping disruptions) continue to weigh on refining margins. Meanwhile, proposed U.S. tariffs on Canadian and Mexican crude could further strain refiners.

For airlines, the transition to SAF and carbon-neutral operations is accelerating. The European Union's Renewable Energy Directive III and U.S. state-level mandates for low-carbon fuels are pushing airlines to invest in alternative energy sources. Delta and American Airlines (AAL) have already secured long-term SAF supply agreements, insulating them from future regulatory penalties.

Actionable Investment Insights

1. Underweight Traditional Refiners: Companies like Valero and Phillips 66 face margin compression and policy risks. Their exposure to legacy refining infrastructure makes them vulnerable to the energy transition.
2. Overweight Energy Transition Plays: Invest in airlines (e.g., DAL, UAL) and industrial retrofitting firms (e.g., CAT, MMM). These sectors benefit from capital flows into decarbonization and sustainable fuels.
3. Monitor Sector Rotation Signals: Track EIA utilization rates as a leading indicator. When utilization falls below 88%, consider increasing airline exposure while reducing energy sector allocations.

The EIA's weekly refinery utilization data is no longer just a gauge for the refining sector—it is a critical signal for sector rotation. As the energy transition accelerates, investors must adapt to a world where high utilization no longer guarantees profitability for traditional energy players. The future belongs to those who recognize the shift in capital flows and align their portfolios with the winners of the green economy.