As net long positions in WTI crude oil hit a 20-week high, the Trump administration is considering invoking the Defense Production Act to expand refining capacity.

As oil prices climb back above $100 a barrel, the U.S. government is considering invoking the Defense Production Act to expand domestic refining capacity, while speculative funds in the crude oil market are further increasing their bullish bets.

According to Reuters, citing sources familiar with the matter, the Trump administration is exploring ways to utilize the Defense Production Act to expand domestic refining capacity. The proposed solutions were discussed at a recent meeting between Trump and nearly 12 U.S. refiners, where White House officials inquired with the refiners about the most effective way to utilize federal funding to increase refining capacity.

No final decision has been made yet, and attendees expect discussions to continue. Refining executives told the government that if federal funding is received, it would be more suitable to improve the efficiency of existing refineries or expand existing facilities than to build new refineries, as new refineries are costly and take many years to become operational.

The rise in U.S. refined product prices has particularly triggered policy pressure. The national average price of diesel in the U.S. has exceeded $6 per gallon for the first time, nearly 60% higher than since the U.S.-Israel military action against Iran in February; U.S. diesel inventories are also 13% lower than the average for the same period over the past five years. Gasoline prices in the U.S. remain high as well.

WTI crude oil fell 2.32% on Friday, but prices remained above $100 per barrel.

Bullish positions in crude oil rise to multi-month high

The latest positioning data from the U.S. Commodity Futures Trading Commission (CFTC) shows that, as of the week ending September 8, speculative funds continued to increase their bets on rising crude oil prices.

Net long positions in NYMEX WTI crude oil increased by 19,720 contracts to 139,339 contracts, a 20-week high; net long positions in Brent and WTI crude oil combined increased by 25,890 contracts to 411,159 contracts, a 16-week high.

The refined oil market also showed a bullish trend. NYMEX gasoline net long positions increased to 92,926 contracts, a new high in about nine months. However, NYMEX heating oil/diesel net long positions fell to 16,004 contracts, a new low in four weeks.

The natural gas market remained bearish, with net short positions in NYMEX natural gas increasing to 76,518 contracts, a five-week high.

In other words, in the week ending September 8, funds significantly increased their bets on rising crude oil and gasoline prices, rather than being bullish on the entire energy sector.

It's worth noting that the CFTC's aforementioned positioning data was as of September 8th, while WTI only subsequently broke through $100 per barrel. Therefore, the timing should be interpreted as speculative funds increasing their long positions in crude oil in advance, followed by a further rise in oil prices, rather than the CFTC data directly causing oil prices to break through $100.

US refining capacity is nearing its limit.

The Trump administration's consideration of using the DPA to expand refining capacity reflects a real problem facing the United States: even with increased crude oil supply, the U.S. refining sector may not be able to quickly convert more crude oil into gasoline and diesel.

U.S. refinery utilization rates have reached approximately 98%, nearing full capacity. With strong fuel demand and global refining capacity impacted by factors such as the situation in the Middle East and attacks on Russian refineries, U.S. refiners have limited room to increase production.

U.S. refining capacity has declined over the past decade, with some unprofitable refineries closing down, further concentrating existing refining capacity in the Gulf Coast region. The Trump administration therefore viewed increasing domestic refining capacity as a long-term solution to alleviate fuel price pressures.

White House spokesman Taylor Rogers said that U.S. refining capacity is crucial to ensuring energy security and a reliable supply, and expanding refining capacity is a priority for Trump and his energy team. The government is currently evaluating specific measures such as regulatory reform, expediting approvals, and increasing investment.

DPA may become a policy tool for expanding refining capacity.

The Defense Production Act is generally regarded as an important tool for the U.S. government to mobilize industrial resources in emergency situations.

In April of this year, the Trump administration took action to designate U.S. domestic oil production, refining, and logistics capabilities as critical to national defense and authorized the use of the DPA to support the expansion of these capabilities. The White House stated at the time that oil fuel is essential to the U.S. military, industrial base, and critical infrastructure.

The key point of this discussion is that the Trump administration may further extend the DPA from a policy tool for securing energy supplies to directly support refinery expansion and efficiency improvements.

However, refiners are not inclined to rely on government funding to build new large refineries. Industry executives prefer federal funds to be used for expanding and improving the efficiency of existing facilities, as building new refineries involves huge investments and long construction periods, making it difficult to solve the current fuel supply shortage.

Crude oil, refined oil prices, and inflation have become major factors influencing policy.

From a market perspective, the current US government is facing more than just rising oil prices.

The Middle East conflict has disrupted the global supply of crude oil and refined oil products. After international oil prices broke through $100 per barrel, the prices of end-use fuels such as diesel and gasoline rose in tandem, which in turn passed on to transportation, agriculture and industry costs, and increased inflationary pressures in the United States.

Rising oil prices have begun to impact US financial markets, with investors worried that rising energy prices could push up inflation and affect the Federal Reserve's future policy path.

The International Energy Agency (IEA) also warned that global oil supply could fall further to 5.7 million barrels per day in 2026, equivalent to about 6% of total supply, due to conflicts in the Middle East and supply disruptions in the Gulf region; Saudi Arabia’s crude oil production fell to about 6 million barrels per day in August, the lowest level in more than 30 years.

For the US government, expanding refining capacity can increase the supply of refined petroleum products in the medium to long term. However, since new capacity takes many years to build, whether gasoline and diesel prices can be lowered in the short term still depends on the recovery of Middle Eastern supply, global refining capacity, and the actual production capacity of existing US refineries.

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