The Energy Select Sector SPDR Fund (NYSEARCA:XLE) has returned 50.7% year to date and 59.46% over the past year. The fund traded at $66.07 as of Monday’s Oct. 12 delayed quotes. Someone looking only at that number would assume the whole sector is working. They might also accept the most common explanation, which credits artificial intelligence and rising electricity demand.
Bill Baruch, founder and president of Blue Line Futures, disagreed with that explanation on CNBC. The numbers back him up.
Three Refiners Did the Heavy Lifting
Here are the same Oct. 12 delayed quotes for three refiners. Marathon Petroleum (NYSE:MPC | MPC Price Prediction) is up 186.16% year to date at $460. Valero Energy (NYSE:VLO) is up 171.37% at $435.20. Phillips 66 (NYSE:PSX) is up 123.87% at $283.05. Bill Baruch said “The top three performers this year are all refiners: Marathon Petroleum, Valero and Phillips. They’re all up over 100%.” Our data shows it.
The fund’s return and the refiners’ returns measure different things. A sector fund’s return combines the results of all its holdings. That means a sector can post a gain while most of its members lag, as long as a few rise far enough. Put the fund’s figure next to the refiners’ figures and the difference is easy to see.
Crack Spreads Explain the Whole Move
A refiner buys crude oil and sells finished products such as diesel, gasoline and jet fuel. The crack spread is the gap between what it pays for crude and what it earns on those products. That gap is where a refiner makes its money. Crude prices can stay flat or even fall while refiners do very well, as long as the spread continues widening.
Baruch said the year’s rally is “really heating oil and diesel crack spreads that have surged.” Traders use heating oil futures as a stand-in for diesel. Baruch explained that “Russia and China are major exporters of diesel globally, and heating oil futures track diesel prices.” He also said that when the U.S. attacked Iran “at the start of March, then it was another tailwind to these prices.” The March timing is his. Other reporting put a U.S. and Israeli attack on Iran in a different month, and we could not shows which event he meant.
America Has Crude. The World Wants Diesel.
Bill Baruch said “The U.S. has refinery utilization running red hot. It’s been continuing to get better. So we don’t have a diesel problem or crude oil problem here in the U.S., because we’re pulling the crude oil to refine. It’s the diesel, which is becoming the real issue.” In other words, the U.S. has plenty of crude and its refineries are busy. Diesel is what’s in short supply overseas, and that shortage is paying American refiners.
The latest earnings reports point the same way. Marathon reported second-quarter EPS of $17.73 against a $13.95 estimate, according to its earnings release filed with the SEC. Valero made $12.54 in adjusted EPS, and Phillips 66 earned $9.41. Both beat estimates. Phillips 66 CEO Mark Lashier described the environment as “more of a supply shock than a demand shock.”
Why the AI Explanation Misses This Rally
Bill Baruch said “A lot of people may say this is the AI trade underpinning energy. It’s not. This is the crack spreads.”
The AI explanation is appealing because it’s a growth story everyone already knows. That story runs through electricity, meaning power generation, utilities and natural gas. The companies that delivered the biggest gains this year turn crude into diesel, which has no connection to powering data centers. If AI demand were driving the sector, different companies would be leading. What we can see fits Baruch’s view: his three top performers are all refiners, and the sector gained far less than any of them. We did not test every energy subsector, so this supports his argument without showing it.
What Fund Holders May Be Missing
Say you bought a broad energy fund this year because you believed in the AI power story. Based on this evidence, the biggest contributors to your fund were doing something unrelated. Your reason for buying and what you actually own can drift apart without you noticing. The way to check is to look at a fund’s holdings and see which ones are making the returns.
Risks That Could Shrink the Margin
Crack spreads move in cycles and tend to fall back toward normal levels. Margins this wide encourage new supply once disruptions ease. Baruch himself raised one risk: a possible energy cease-fire aimed at driving diesel prices lower. Anything that eases the shortage also eases the margin.
Gains this large already reflect a lot of good news. And Baruch was explaining why the rally happened. He did not give a price target or a timeframe.
Ask Who Carried the Sector
When a sector posts a big number, find out whether the sector as a whole rose or a few members carried it. Those two situations lead to very different conclusions.