In March 2026, the distillate crack spread at New York Harbor averaged $1.42 per gallon. That is not a typo. The 2021–2025 five-year average for the same spread is 68 cents. The last time a monthly print broke $1.40 was 2022, in the immediate wake of the Russian crude embargo, and even then the rip was short — six weeks, mean reversion, back to a 70-cent regime by autumn.
The 2026 print is different in a way that matters for everyone underwriting a hydrocarbon project this decade: it is not a price shock. It is a capacity shock. Seven major US refinery closures and conversions since 2019 have permanently removed more than 1.2 million barrels per day of crude-processing capacity from the domestic stack. That capacity is not coming back. The crews have been re-deployed. The towers have been cold-cut. The land has been remediated for chemical-plant or warehouse re-use. The federal permits required to replicate any one of those sites — air, water, land, community — would now take a developer somewhere between five and nine years to assemble, and that is before the first piece of stainless arrives on site.
The refinery you cannot build is the refinery you cannot use to lean against the spread.
The Capacity Already Gone
The arithmetic is unambiguous. LyondellBasell shuttered its 290,000 b/d Houston refinery in Q1 2026. Phillips 66 will cease operations at its 139,000 b/d Wilmington, California facility by year-end. Marathon Martinez and Phillips 66 Rodeo have been converted to renewable-diesel duty (a real product, but on a 50,000-to-65,000 b/d basis each, not the 240,000 b/d crude throughput they used to swing). PBF’s East Coast posture is reduced; the Bay Area has lost most of its swing barrel. The Gulf is running flat-out — US Gulf Coast utilization sat in the 93 to 95 percent range during normal seasonal maintenance windows even before the spring Hormuz disruptions added marine distillate to the bid stack.
What replaces those barrels? Nothing of comparable scale. There is not a single greenfield 200,000-plus b/d refinery on the US construction map. There is not even a credible permit application. The reason is not technological — the cracking, hydrotreating, and reforming chemistries are decades-mature — but rather a stack of permitting and capital-stack realities that have made full-scale refinery construction in the US economically irrational since the late 1970s. Marathon Garyville was the last greenfield US refinery to come online. That was 1976.
The Demand That Will Not Bend
If demand were collapsing, none of this would matter. Demand is not collapsing.
EIA projects US distillate consumption to rise from 3.79 MMb/d in 2024 to 3.96 MMb/d in 2026 — a roughly 4.5% lift driven by sustained truck-freight intensity, marine bunker re-routing around the Strait of Hormuz, and the diesel-heavy load profile of US data-center backup-generator fleets. Jet fuel is the more dramatic story: 2026 demand is projected at an all-time-high 1.76 MMb/d, and the EIA’s days-of-supply forecast for the year is 21 days — the lowest reading since 1963. That 21-day number is not a function of geopolitical risk. It is a function of domestic refining contraction at the same moment commercial aviation has fully reattached to the global GDP trajectory and military airlift requirements have stepped up.
Sustainable aviation fuel was supposed to bridge the gap. It is not. EIA expects SAF to supply just 2% of US jet-fuel consumption in 2026, and global SAF supply growth has been revised downward to 2.4 million metric tons for the year on persistent feedstock-cost and policy-design problems. That is roughly 0.8% of global jet consumption. SAF is a real and important molecule, but at current scale it is not the relief valve the 2030 climate plans assumed.
Why This Is a Permanent Margin Regime, Not a Cycle
The most common analyst error in 2026 will be to mark the current crack spread to revert. It will not revert on a normal cycle timescale, and the reason is structural rather than tactical. A refinery is a multi-billion-dollar, multi-decade capital asset that requires roughly 600 acres of permitted industrial land, a deep-water or pipeline-connected logistics anchor, an air permit, a water permit, a community-host agreement, and a workforce that does not yet exist in the geographies that need it most. New capacity does not arrive in twelve months when prices spike. It arrives in seven years when it arrives at all, and the last twenty years of US construction history say it usually does not.
The capacity that does enter is therefore disproportionately likely to be modular and distillate-tilted. Modular because the prefabricated, skid-mounted, factory-fabricated unit can be permitted, financed, and erected on a two-to-four-year timeline rather than seven. Distillate-tilted because the marginal economic barrel in this regime is jet and diesel — and because a refinery designed from a clean sheet to maximize middle distillate yield (a different optimization than the 1970s gasoline-skewed asset base) captures the spread the legacy stack cannot.
The Dual-Use Angle: JP-8, SPK, and the Defense Logistics Tail
The refining conversation in 2026 cannot be had honestly without the defense piece. JP-8 — the NATO-standardized military aviation turbine fuel — is, chemically, a kerosene-range distillate with an additive package on top of essentially the same backbone as commercial Jet A. Under MIL-DTL-83133H, synthetic paraffinic kerosene (SPK) blends are permitted to substitute up to 50% of conventional JP-8. That specification matters because it means the same modular distillate-first refinery that produces commercial jet and ULSD can, with no architectural change, contribute meaningfully to military airlift fuel resilience.
The Defense Logistics Agency Energy procures roughly 90 million barrels of fuel a year, the bulk of it distillate. The current procurement model is dependent on roughly the same fragile commercial supply chain as the rest of the country. A geographically distributed network of 5,000-to-15,000 b/d modular distillate-first refineries, sited near base load and pipeline-disconnected from the Gulf Coast bottleneck, is not a hypothetical — it is a recurrent line item in the last three years of DoD Operational Energy strategy documents. The molecule is the same. The customer is the same. The supply-chain risk is the difference.
The Funding Window Closes in 130 Days
The DOE Loan Programs Office (now operating as the Office of Energy Dominance Financing) holds a $250 billion authorization under the Energy Infrastructure Reinvestment (EIR) program. That authority expires on September 30, 2026. Re-authorization is possible but not assured, and the gap between authorization and re-authorization is exactly the kind of gap that strands credible projects on the wrong side of a funding cliff.
LPO has already demonstrated appetite for refinery-adjacent assets. The recent loan to expand an alternative-jet-fuel refinery in Montana, the Michigan nuclear restart, and the broader portfolio re-orientation around \”energy dominance\” all signal that distillate-anchored, domestically-located, dual-use-capable refining infrastructure is squarely inside the office’s current mandate. The 130-day window between today and the September deadline is the most consequential financing window the US downstream sector has had in twenty years.
What to Watch in the Back Half of 2026
Three signposts will tell underwriters and operators which way the regime breaks.
First, the Wilmington shutdown sequence. Phillips 66’s California exit is the cleanest forward-looking test of West Coast distillate-spread persistence. Watch the Los Angeles jet-fuel basis against the Gulf Coast through Q3 — a sustained $0.30+/gal premium will confirm the regime is regional as well as national.
Second, refining-permit announcements for modular-scale projects. The 5,000–25,000 b/d cohort is where new capacity is most likely to enter. Track DOE LPO conditional commitments, NRC and EPA permit advisories, and state-level brownfield re-use announcements (especially Wyoming, North Dakota, and Oklahoma).
Third, the DLA Energy contract calendar. Multi-year, modular, geographically distributed JP-8 / Jet A-blend awards in Q3 and Q4 will signal that the defense logistics tail is moving from \”concept\” to \”request for proposal.\”
The Bottom Line
The 2026 distillate squeeze is not a trade. It is a structural margin regime that the US refining stack will not unwind inside this decade. The middle of the barrel — diesel, jet, and the JP-8/SPK military-blend pool — is the most valuable hydrocarbon real estate on the planet. The companies that build the next layer of US refining capacity will not look like the companies that built the last layer. They will be smaller, modular, distillate-first, and dual-use-capable. They will close their funding inside the next 130 days or they will close it through a different door entirely.
The math has already been done. The capacity already gone is not coming back. The demand is not bending. The window is closing.
About Porritt Inc.
Porritt Inc. is a Delaware C-corporation with operations in Salt Lake City, Utah, building the next generation of refinery engineering software (NEXUS CAD, NEXUS Compliance AI, NORMEX Standards AI) and developing distillate-first micro-scale refining concepts under the Project Genesis program. Porritt Inc. holds SAM.gov registration UEI WQWHVJ1J98S9 / CAGE 9Z7B9 and is an active applicant in DOE, DoD, NASA, and NSF federal funding programs.
For investors, federal partners, and refining customers: if the distillate-first thesis maps to your underwriting, project pipeline, or supply-chain resilience program, we welcome a 30-minute introductory conversation. Contact Timothy Porritt at tim@porrittinc.com or visit porrittinc.com/contact.
Sources: EIA Dallas Fed Energy Indicators (March 2026); EIA Today in Energy (Q1 2026 product-price update); OPIS 2026 Jet Fuel Preview; Oil & Gas Journal US distillate inventory outlook; S&P Global SAF outlook (December 2025); DOE Office of Energy Dominance Financing program briefing; IATA Fuel Fact Sheet; MIL-DTL-83133H specification.