Preceding Meeting Of US and Russian Leaders Ukrainian Drones Increase Attacks On Russian Energy Infrastructure

It’s a cautious and mixed start for energy markets Wednesday with diesel futures trading down about ½ a cent while gasoline prices are trading up about ½ cent and crude oil prices hover near breakeven.

ULSD futures settled at a 2 month low Tuesday, reaching their lowest prices since the day before Israel started its bombing campaign in Iran. The limited follow through selling this morning so far suggests we haven’t yet hit a technical trap door that will spark a round of heavy selling, but don’t be surprised if we see that later this week, particularly if the overnight low of $2.2245 doesn’t hold today.

While the world awaits Friday’s meeting between the U.S. and Russian leaders, both Ukraine and Russia are stepping up their attacks in what appears to be an effort to add bargaining chips to the table. While Russia has been attempting a breakthrough to take small bits of territory this week, Ukrainian drones are increasing their attacks on Russian energy infrastructure with numerous refineries hit in the past week, and the largest pumping station on the country’s largest oil pipeline hit overnight.

The API’s weekly report that showed a draw in gasoline inventories of 1.8 million barrels, while oil inventories built by 1.5 million barrels, and diesel stocks had a small increase of just under 300,000 barrels. The DOE’s weekly report is due out at its normal time this morning.

In addition to the weekly stats, the EIA, IEA and OPEC all published their monthly oil market reports in the past 24 hours.

The IEA continues to downgrade its outlook for global demand, with slumping activity in China, India, Brazil and Japan offsetting strength in several other markets. The agency also increased its supply forecast, which creates a “bloated” outlook for market balances as OPEC’s withheld supply returns to the market, although the report does acknowledge that supply could tighten up if the U.S. tightens sanctions on Russia and Iran.

In what has become a typical contradiction to the IEA data, OPEC is raising its global demand forecast while holding its supply projections steady, which will help the cartel justify its recent decisions to remove most of their voluntary output cuts. The report also highlighted how the tight diesel market in the Atlantic basin was giving a big boost to refiners, and keeping U.S. inventories low. That shortage is a stark contrast to the Pacific basin where increased Chinese output is keeping downward pressure on margins and pushing global refinery runs to an all-time high in July.

OPEC’s output increased by 263mb/day during July with Saudi Arabia and UAE accounting for essentially all of the gains. In total, OPEC & Friends increased output by 335mb/day, which is about 100mb/day less than their “target” increase, which was widely expected given that several countries had been exceeding their targets for several months.

The report also showed healthy declines in freight rates for shipping as the easing tensions in the Middle East removed much of the risk premium with shipping both crude and products.

The EIA slashed its forecasted price for Brent crude oil by 12% for next year as the agency’s contracted analysis believe OPEC’s output increases will outpace demand in the coming year. That drop in crude oil prices will correspond to average gasoline & diesel prices being about 20 cents/gallon lower in 2026 than they’ve been in 2025 according to the latest STEO forecast. The drop in diesel prices is a tougher case to make as petroleum distillate inventories (excluding renewables) are set to end the year at a 25 year low. The EIA’s projection suggests that more RD and Bio supply will come back online to offset the drop in traditional inventories.

Forecast models continue to be in alignment that Hurricane Erin will stay offshore as it comes dangerously close to Puerto Rico and the Virgin islands this weekend and moves north off the East Coast next week. While it looks like we’ll dodge any direct impacts from the first major hurricane of the season, rough seas and some heavy rains will still create indirect impacts that could cause shipping delays for waterborne facilities along the eastern seaboard. AccuWeather noted this week that the last time we had a Hurricane named Erin, it too stayed offshore of the US East Coast, on 9/11. The NHC is tracking a new system off the eastern Mexican coastline this morning, but that system is expected to move inland with no impact to the U.S..

Renewables update:

Calumet reported on their Q2 results call that it continues to run its Montana Renewables plant at full rates despite a challenging margin environment created by the expiration of the Blender’s Tax Credit. The refiner didn’t mention its output mix but expressed its commitment to expand its SAF production by ~10mpd by early 2026, despite the current 45Z rules capping credit prices for the fuel at $1 per gallon. It will be interesting to see if this positive outlook is just bluster for the shareholders as the refiner will “continue to make monthly run decisions based on near term economic signals”.

The EPA continues to hear comments on their proposed Renewable Fuel Standard policies for 2026 and 2027. A retail contingent including NACS, SIGMA and NATSO joined forces in encouraging the EPA to align the RFS with the CFPC (45Z) regulation, and increase the Renewable Volume Obligation rather than apply a 50% RIN value to imported fuels which they believe will create supply issues. The petition also requested that the EPA deny all small refinery exemptions and eliminate the Jet Fuel waiver from the RVO. RIN prices have been volatile this week, dropping to $1.07 for D6 contracts yesterday morning before rallying north of $1.14 already this morning.