President Donald Trump has urged oil companies to expand refining capacity in an effort to reduce fuel costs at the pump. This push comes amid escalating tensions with Iran and rising crude prices.

A Tough Sell

A report by the Wall Street Journal detailed Trump's meeting with oil executives on Tuesday, where he advocated for scaling up refining infrastructure. The report noted that expanding capacity could be a "tough sell" for producers, as building new refineries may not yield immediate profitability for these enterprises.

Constructing such facilities requires billions of dollars in investment and takes years to execute. GasBuddy analyst Patrick De Haan told Benzinga that oil producers are beholden to shareholders and lack the incentive to lower gas prices on command. De Haan added that even if companies choose to build new projects, it would take years for them to bear fruit.

Chevron Charts Venezuela Investment

Oil giant Chevron Corp (NYSE: CVX) recently announced plans to invest over $7 billion over the next five years. The company targets doubling production to approximately 600,000 barrels per day from 2026 levels.

This move follows Trump's claim that the U.S. had secured 65 billion barrels of oil from Venezuela, which he touted as the "biggest oil deal" in world history. While Trump suggested Venezuelan oil could offset high costs, De Haan warned that refining capacity remains a challenge. He noted there is no room for more oil, as refineries were working at 95% capacity all summer.

Oil, Gas Prices

At the time of writing, West Texas Intermediate (WTI) crude futures expiring in October were down 1.07% at $90.04 per barrel. Brent crude futures expiring in November declined 1.18% to hover around $94.5 a barrel.

On the retail front, the national average price of gasoline remained above $4, specifically at $4.1203/gallon on Wednesday. The national average price of diesel stood at $5.6879/gallon, according to data from the American Automobile Association (AAA).

Geopolitical Context

Amid the Iran conflict, Trump reportedly approved a "tanker for tanker" policy against Iran. The U.S. struck two Iranian oil vessels parked ahead of a naval blockade imposed by Washington. These strikes followed an exchange of missile strikes after the U.S. targeted Iranian sites on Sunday.

Iran responded by targeting U.S. assets in the region and criticized a strike in Iran's Kuhestan on a wedding celebration that resulted in four deaths, including a child. Trump also suggested renaming the Strait of Hormuz the "Trump Strait," citing U.S. control over the waterway. This suggestion faced staunch criticism from Democratic leaders, including Senate Minority Leader Sen. Chuck Schumer (D-NY).

The worst US-Iran exchange of fire since July has pushed October WTI crude up 0.48% to around $89, marking a fresh six-week high. Investors are focusing on energy and defense ETFs as hostilities raise fears of prolonged disruptions to global oil flows through the Strait of Hormuz.

Hormuz Remains the Key Oil-Market Risk

The Strait of Hormuz is central to the market's response. Energy Secretary Chris Wright stated that more than 17 million barrels of oil passed through the strait on Monday, indicating that flows have not yet been shut down. This data point limits crude's immediate gains, highlighting a key tension: as long as the strait remains open, geopolitical fears alone struggle to sustain a large oil premium.

However, US military strikes on Iranian radar systems and mine-laying capabilities, combined with Tehran's retaliation, raise the possibility of further disruption. Trump noted that the US naval blockade of Iranian ports is pressuring Tehran and that there is no timeline for ending the conflict.

Broader Middle East risks also factor into the outlook. New Israeli strikes on Iran-backed Hezbollah in Lebanon and Hamas in Gaza, along with Houthi attacks on ships in the Red Sea and reported attacks on vessels around Hormuz, increase the potential for prolonged regional conflict.

A Tightening Global Supply Backdrop

Oil's bullish case is reinforced by supply concerns outside the Middle East. The International Energy Agency (IEA) warned that global inventories could decline at more than double its previously projected rate in the third quarter due to disruptions linked to the US-Iran war. This occurs even as high prices and weaker economic activity weigh on demand.

Russia presents another pressure point. Ukrainian drone attacks have repeatedly targeted Russian refineries, tankers, and pipeline infrastructure. According to S&P Global, Russian crude runs fell below 4 million bpd in July, the lowest level in more than two decades. Meanwhile, the IEA reported that Russian crude production fell to 8.89 million bpd.

ETF Implications

The supply backdrop strengthens the case for specific funds:

Defense ETFs such as ITA and PPA gain support from continued US military operations, weapons consumption, and the prospect of prolonged Middle East tensions. These factors reinforce expectations for higher defense spending and munitions replenishment.

Conversely, the airline industry faces headwinds. The U.S. Global Jets ETF (JETS) could face pressure if crude and gasoline prices remain elevated, creating a direct margin challenge for carriers.

What the Numbers Show

The divergence between physical flow data and price action is notable. While over 17 million barrels passed through the Strait of Hormuz on Monday, confirming operational continuity, crude prices still rose to a six-week high. This suggests that the market is pricing in the risk of future disruption rather than an immediate supply shock, driven by the broader geopolitical context including Russian production declines to 8.89 million bpd.