Diesel Rallies, OPEC Eases Cuts as U.S. Energy Policy Shifts Post-Holiday

U.S. energy traders are returning to the office after an eventful long weekend.

Diesel futures continue trying to lead the complex higher, with the August HO contract up nearly 4 cents/gallon, while gasoline futures lag and are up only a penny in the early going. WTI prices are close to breakeven from Thursday’s settlement, while Brent prices are up around 50 cents since they settled Friday.

OPEC & Friends announced they were accelerating their targeted production increases in August by 548mb/day, vs the 411mb/day they’d been increasing the past few months. Of course, as has been the case since the cartel started bringing its voluntary reductions back online, the actual output increase by month will be notably less than the targeted change, because several of the countries have been overproducing the agreement, but at least now they’ll be cheating less. While the headline is certainly bearish for oil prices, and prices did dip when trading resumed last night, it’s worth noting the bullish undertones of the note that suggests the oil market fundamentals are healthy and may explain the rebound this morning.

The new spending & tax law signed on Friday extended the Clean Fuel Production Credit (AKA 45Z) by years, and restricted the feedstocks eligible for the credit to those grown in the U.S., Canada and Mexico. The updated rule also takes away the extra 75 cent/gallon incentive for SAF production, so all biofuels will have a $1/gallon maximum, and is likely to push multiple producers back towards RD and away from SAF given the extra costs with producing renewable aviation fuel.

While the bill took away numerous incentives for other forms of renewable energy and EVs, it did leave provisions for carbon capture and sequestration which will be seen as wins for both the oil and ethanol industries. The biodiesel industry has been hit the hardest in recent years, and they were thrown a small bone in the law with the re-instatement of a 10 cent/gallon credit for “small” producers that make 60 million gallons or less/year for 2025 and 2026. Given the timing and size of that rule, it seems unlikely to make a “large” impact on biodiesel output. With this law’s passage it would appear that the BTC is officially dead, with the changes to the 45Z seen as some compromise to those pushing for yet another retroactive return.

Tropical storm Chantal made landfall over the Carolinas this weekend bringing heavy rains to large swaths of the East Coast. The impact of that storm so far is minimal compared to the devastation brought by heavy rains in central Texas, part of which were remnants of Tropical Storm Barry that hit Mexico last week. With more than 80 dead and 40 still missing, this is a huge story that will have widespread impacts, but so far it appears that energy production and distribution networks were not impacted as there are no refineries or major production facilities in the area.

Houthi rebels appear to have attacked another ship transiting the Red Sea over the weekend, then Israel launched its first strikes on the group in several weeks this morning, hitting several ports and a power plant.

A 6th Russian tanker ship had a mysterious explosion over the weekend, although it’s so far unclear if this was another act of sabotage or simply a leak.

The CFTC’s weekly report is delayed until this afternoon due to the Friday holiday, but data from ICE shows money managers continued to reduce their exposure to Brent last week as the war-premium is taken back out of the market. Large speculators were adding shorts to both Brent and Gasoil contracts last week, but the European diesel contract also saw an inflow of new bets on higher prices that pushed its net long position slightly higher on the week.

Baker Hughes reported 7 more oil rigs were taken out of service last week in the U.S., bringing the total rig count to its lowest since September 2021. The natural gas rig count declined by 1 on the week. The Permian basin accounted for most of the decrease last week with its count down by 5.