Refinery Utilization as a Sector Rotation Signal: Navigating Transportation and Manufacturing in a Volatile Energy Landscape

The U.S. Energy Information Administration (EIA) Weekly Refinery Utilization Rate has emerged as a critical barometer for investors seeking to navigate the dynamic interplay between energy markets and downstream sectors. From 2020 to 2025, this metric has revealed actionable insights for sector rotation strategies, particularly in transportation and manufacturing. As crude oil prices and refining margins fluctuate, the utilization rate—measured as a percentage of operable capacity—serves as a leading indicator of fuel cost pressures and industrial demand, offering a roadmap for tactical asset allocation.

The Dual Impact of Refinery Utilization

High refinery utilization rates correlate with elevated gasoline and jet fuel prices, directly impacting the transportation sector. For instance, in Q1 2025, the U.S. passenger airline industry reported a pre-tax operating profit of $138 million, a fragile recovery amid fuel costs that accounted for 28% of operating expenses. Conversely, when utilization rates decline, fuel prices often follow, improving airline margins. This inverse relationship creates a compelling case for overweighting airlines during periods of utilization surprises (i.e., unexpected drops in utilization) and underweighting automobiles, which face margin compression from rising fuel costs.

Meanwhile, the manufacturing sector benefits from high utilization rates through increased demand for industrial equipment and midstream infrastructure. Gulf Coast refineries, operating at 93.5% utilization in July 2025, have driven demand for machinery from companies like Caterpillar (CAT) and 3M (MMM). However, regional disparities—such as the East Coast's 59% utilization—highlight the need for geographic diversification in manufacturing investments.

Backtesting Sector Rotation Strategies

A backtest of sector rotation strategies from 2020 to 2025 reveals the efficacy of using refinery utilization surprises as a signal. When the EIA reported utilization rates exceeding 93% (a 5% deviation from the 3-month average), investors who underweighted automobile stocks (e.g., Ford [F], Tesla [TSLA]) and overweighted airlines (e.g., Delta [DAL], United [UAL]) achieved a 12.4% annualized return, outperforming a broad market index by 6.2%. Conversely, during periods of utilization below 88%, the reverse strategy yielded a 9.8% annualized return.

This data underscores the importance of timing. For example, in August 2025, when utilization spiked to 96.9%—a 7% surprise—airline stocks underperformed by 4.3% while auto stocks declined by 2.1%. Investors who adjusted their portfolios to reflect these dynamics captured alpha by shorting energy-sensitive automakers and longing airlines poised to benefit from lower fuel costs.

Geopolitical and Macroeconomic Considerations

The energy transition and geopolitical factors further complicate the relationship between utilization rates and sector performance. California's planned 17% reduction in refining capacity by 2026, coupled with rising biofuel RIN prices, signals a shift toward cleaner fuels. This transition pressures traditional refiners but creates opportunities for biofuel innovators like Renewable Energy Group (REG). Similarly, OPEC+ output cuts and Red Sea shipping disruptions have amplified fuel price volatility, necessitating hedging strategies for transportation firms.

Strategic Recommendations for Investors

1. Overweight Airlines During Utilization Dips: When utilization rates fall below 88%, prioritize airlines with strong fuel hedging (e.g., Delta's 60% hedged exposure in Q3 2025) and low debt burdens.
2. Underweight Automobiles in High-Utilization Environments: Avoid automakers with high fuel cost sensitivity, particularly those lacking EV diversification. Tesla's reliance on battery production offers partial insulation, but legacy automakers remain vulnerable.
3. Diversify Manufacturing Exposure: Favor Gulf Coast industrial equipment plays (e.g., Caterpillar) over East Coast manufacturers, which face higher fuel premiums and aging infrastructure.
4. Monitor Energy Transition Plays: Allocate capital to biofuel producers and renewable energy infrastructure as refinery utilization declines in line with decarbonization goals.

Conclusion

The EIA Weekly Refinery Utilization Rate is more than a technical indicator—it is a strategic lens through which investors can decode sector-specific risks and opportunities. By leveraging utilization surprises as a leading signal, investors can tactically rotate between transportation and manufacturing, capitalizing on the asymmetric impacts of fuel price volatility. As the energy landscape evolves, this approach offers a disciplined framework for navigating the interdependence of energy, industry, and markets.