US Refining Outlook 2026: Capacity Closures, Venezuelan Crude, and Crack Spread Forecasts

Executive Summary

The US refining sector is reaching a structural inflection point in this 2026 outlook, driven by three converging forces. First, capacity rationalization has permanently reduced supply by nearly 1,000 kb/d since 2023. Second, significant margin expansion is creating $15-20B in incremental EBITDA potential. Finally, the surge in Venezuelan heavy crude imports provides PADD 3 (Gulf Coast) refiners with a $12-18/bbl feedstock advantage. This analysis identifies the strategic winners and three imperatives for executives navigating this market transformation.

Key Findings:

• Refinery closures have permanently tightened the supply-demand balance, supporting 2026 crack spreads 35-45% above 2022-2024 averages
• Gulf Coast refiners with heavy crude processing capability could capture $200-300M in additional annual margin per 300 kb/d of capacity
• Venezuelan crude volumes reaching 400-500 kb/d create significant competitive divergence between PADD 3 operators and other regions
• The strategic window for opportunistic M&A and feedstock contract optimization remains open for 12-18 months

I. The 2026 Structural Supply Deficit: Quantifying US Refining Capacity Impact

How Refinery Closures are Reshaping the 2026 Competitive Landscape

Between 2023 and early 2026, the US refining industry has retired approximately 900 kb/d of capacity through major exits, including LyondellBasell Houston (264 kb/d), Phillips 66 Wilmington (139 kb/d). Critically, the January 2026 announcement that Valero’s Benicia refinery (145 kb/d) will begin a phased idling through April further tightens PADD 5 supply. This pushes regional sensitivity to a breaking point, reinforcing the structural shift toward Gulf Coast dominance. EIA projections incorporate an additional 150-200 kb/d of closures through year-end 2026.

Strategic Implication: The 5-year supply overhang that suppressed margins post-pandemic has been eliminated. Remaining capacity is running at 93-95% utilization versus a 90% historical average, with maintenance schedules compressed to maximize throughput during high-margin windows.

Margin Impact Quantification:

• Gasoline crack spreads averaged $28-32/bbl in 2026 versus $22/bbl in 2023-2024
• Diesel spreads projected at $0.84/gal ($35.28/bbl), up from $0.65/gal historical average
• For an integrated Gulf Coast refiner processing 500 kb/d, this spread expansion translates to approximately $1.8B in incremental annual gross margin versus 2023 baseline

Regional Refining Margins: Why PADD 3 Outperforms PADD 2 and PADD 5

Gulf Coast refiners benefit from proximity to export markets, pipeline infrastructure, and feedstock flexibility. West Coast and some inland facilities face structural disadvantages:

II. The Venezuelan Crude Windfall: A Strategic Advantage for Gulf Coast Refiners

Feedstock Economics Transform Competitive Positioning

The normalization of Venezuelan heavy sour crude exports has created a structural arbitrage opportunity. Current import volumes of 300-400 kb/d could expand to 500+ kb/d by year-end, with Merey crude trading at $12-18/bbl discounts to comparable heavy grades.

Strategic Winners: Analyzing Valero, Marathon, and Chevron’s Feedstock Edge

Tier 1 Positioned (High Capture Potential):

• Valero Energy: Operates 1.7M b/d Gulf Coast capacity with coking capability; estimated to process 150-200 kb/d Venezuelan crude, capturing $400-600M annual margin uplift
• Marathon Petroleum: PADD 3 heavy crude infrastructure allows 180+ kb/d throughput; integrated midstream reduces feedstock logistics costs
• Chevron: Existing Venezuela relationships and Gulf Coast complexity support rapid volume scaling

Tier 2 Positioned (Moderate Benefit):

• Phillips 66: Some Gulf Coast exposure but transitioning assets reduce upside
• PBF Energy: Delaware City and Chalmette positioning provides selective access

Limited Exposure:

• West Coast operators (limited heavy crude infrastructure)
• Pure light sweet refiners without coking/upgrading capability

Downside Scenario Planning

Risk 1 - Supply Disruption (30% probability): If Venezuelan exports decline 50%+ due to geopolitical instability, heavy-light crude differentials could compress $8-12/bbl. Gulf Coast margin advantage would be reduced by approximately 40%, eliminating $3-5B in industry-wide upside.

Mitigation: Diversify heavy crude sourcing (Canadian, Mexican), maintain processing flexibility to shift to medium sours

Risk 2 - Regulatory Tightening (20% probability): Renewed sanctions or compliance requirements could restrict Venezuelan volumes within 6-12 months. Early movers with secured offtake agreements maintain access; late entrants face supply gaps.

Mitigation: Execute long-term supply contracts now while discounts persist and the regulatory environment remains stable

III. 2026 Refining Margin Dynamics: Are Crack Spreads Structural or Cyclical?

Why This Expansion Is Different

Unlike cyclical margin spikes driven by temporary supply shocks, current crack spread strength reflects permanent capacity exits meeting resilient demand:

Structural Support Factors:

• Domestic gasoline demand holding at 8.8-9.0M b/d despite electrification headwinds
• Diesel consumption is supported by industrial activity and inventory restocking
• Export demand from Latin America remains robust (600-800 kb/d refined products)
• Limited new refining capacity additions globally offsetting closures

Cyclical Headwinds (Manageable):

• Crude oil price softness (WTI $68-72/bbl) reduces absolute margins but strengthens cracks
• Potential recession risk could reduce demand by 200-400 kb/d, absorbing ~50% of margin expansion
• Summer driving season variability introduces quarterly volatility

Base Case 2026 EBITDA Impact: Assuming industry operates 16.5M b/d at current spreads, incremental margin capture versus 2023 baseline: $15-20B annually across the sector

IV. Three Strategic Responses Shaping the 2026 Refining Landscape

The structural shifts in US refining are prompting three distinct strategic responses among operators, each with different risk-return profiles and competitive implications.

1. The Feedstock Optimization Play

Leading Gulf Coast refiners are aggressively repositioning their crude supply chains to capture the Venezuelan heavy crude discount. Industry sources indicate long-term offtake negotiations are underway, with contracts ranging from 2-5 years at fixed or formula-based pricing.

Economics Driving Behavior: Processing 300 kb/d of Venezuelan crude at a $15/bbl discount versus alternative heavy grades generates approximately $1.6B in annual value capture. This margin differential is sufficient to justify logistics investments, storage expansion, and crude quality assurance infrastructure.

Market Observations:

• Valero and Marathon have publicly discussed expanding heavy crude intake capabilities
• Secondary market activity for Venezuelan crude storage capacity has increased 40% since Q4 2025
• Refiners are diversifying beyond spot purchases toward structured supply agreements, signaling confidence in sustained availability

Competitive Implications: Early movers establishing preferential supply relationships may lock in structural cost advantages lasting 24-36 months. Late entrants face potential volume constraints as Venezuelan production allocation becomes more competitive.

2. Consolidation and Portfolio Rationalization

A distinct M&A cycle is emerging as margin divergence between advantaged and disadvantaged assets widens. West Coast facilities, lacking access to discounted heavy crudes and facing higher regulatory costs, are trading at significant discounts to Gulf Coast comparables.

Valuation Dynamics:

• Distressed PADD 5 assets: 0.4-0.6x replacement cost
• High-utilization PADD 3 refineries: 0.8-1.0x replacement cost
• Differential represents 40-60% valuation gap driven purely by geographic and feedstock positioning

Transaction Activity: Industry analysts note increased interest in dormant heavy crude processing units and integrated midstream assets. Strategic buyers appear focused on acquiring feedstock flexibility rather than pure capacity, suggesting consolidation is being driven by crude access logic rather than traditional scale economies.

Market Structure Impact: If current trends continue, the industry could see 3-5 additional closures or ownership changes by year-end 2026, further concentrating capacity among operators with superior feedstock positioning and financial resilience.

3. Operational Intensity and Margin Capture

Across the sector, operational strategies are shifting to maximize uptime during high-margin periods. Maintenance scheduling patterns reveal a deliberate compression of planned turnarounds, with refiners deferring discretionary work to sustain throughput.

Utilization Trends:

• Gulf Coast refiners averaging 94-96% utilization in Q1 2026 versus 91% historical norm
• Maintenance windows being concentrated in Q1 2027 when seasonal demand softens
• Unplanned downtime incidents declining as operators prioritize reliability investments

Product Slate Optimization: Refiners with flexibility are tilting toward diesel and distillate production where crack spreads show greatest strength. Industry data suggests distillate yields have increased 2-3% on a portfolio basis as operators respond to price signals.

Financial Magnitude: For a 300 kb/d refinery, each incremental percentage point of annual utilization generates $50-80M in margin at current crack spreads. This economic incentive is reshaping maintenance philosophies and capital allocation toward reliability-enhancing projects.

Sustainability Question: Current utilization rates are approaching physical and regulatory limits. The question facing the industry is whether this operational intensity can be maintained through 2027, or if deferred maintenance creates eventual reliability issues that force correction.

V. 2027 Outlook: How Long Will the Refining Margin Window Remain Open?

How Long Does This Window Remain Open?

Bull Case (40% probability - 24+ months): Continued demand resilience, no major capacity additions, Venezuelan supply remains stable. Margins sustain at current elevated levels through 2027.

Base Case (45% probability - 12-18 months): Gradual demand softening and some capacity creep (restarts, debottlenecks) moderate spreads by late 2026. Margins remain above historical average but compress 20-30% from current peaks.

Bear Case (15% probability - 6-12 months): Recession reduces demand 400+ kb/d, Venezuelan supply disrupted, global capacity additions accelerate. Spreads revert to 2023 levels by Q4 2026.

Strategic Posture Recommendations

For Gulf Coast Leaders: Aggressively capture current margins while building feedstock optionality through diversified sourcing and contract structures that allow flexibility.

For Marginal Operators: Evaluate strategic alternatives now—potential sale values are elevated given scarcity premium on remaining capacity.

For Investors: Refining equities offer compelling risk-reward given FCF generation potential, but selectivity matters. Focus on operators with proven heavy crude capability, integrated logistics, and capital discipline.

Conclusion: Navigating the US Refining Consolidation Endgame

The US refining sector is completing a decade-long rationalization that began post-pandemic. What emerges is a leaner, more profitable industry with clear strategic winners. The combination of structural capacity discipline, margin expansion, and geopolitical feedstock opportunities creates a 12-18 month window for decisive action.

Executives who move quickly to secure advantaged crude positions, optimize asset portfolios, and maximize operational performance will define the competitive hierarchy for the next cycle. Those who wait risk being permanently disadvantaged as the industry consolidates into strength.

The question is no longer whether US refining has turned a corner—it's who will be positioned to capitalize on it.

EnergyStrat provides strategic advisory and market intelligence to energy sector leaders navigating industry transformation. Contact us to discuss how these trends impact your specific competitive position and strategic options.