Hedge funds shift to long positions as US fuel supply tightens

Speculative investors have reversed their earlier bearish stance on energy markets, building substantial long positions in fuel contracts as a domestic supply squeeze deepens in the United States. This shift in sentiment follows a period during which traders largely expected the conflict between the United States, Israel, and Iran to conclude swiftly, allowing oil flows through the Strait of Hormuz to normalise. That expectation has not materialised. Instead, the global market is experiencing a fuel shortage, prompting traders to adopt a bullish outlook, particularly regarding refined products within the US. The country, which serves as the world’s largest consumer of crude oil and a major exporter of both crude and refined fuels, has failed to insulate itself from these supply constraints. The tightening of domestic supply is attributed to several factors, including increased export volumes and a cautious response from the oil industry to war-driven price increases. Additionally, the structural decline in the number of refineries over the past three decades has left existing facilities unable to meet current demand levels.

The diesel market has been particularly affected by these developments. The diesel crack spread, which measures the pricing difference between a barrel of crude oil and the diesel refined from it, reached record highs in both the United States and Europe in mid-August. ING’s commodity analysis team noted in a recent report that disruptions to diesel exports from the Middle East and Russia, combined with a lack of signs for an imminent recovery, are likely to keep middle distillate cracks elevated and volatile. This outlook is reinforced by the approach of seasonally stronger demand periods. In the United States, diesel prices recently hit an all-time high of over $5.81 per gallon. Although this record was briefly surpassed, current prices remain above $5.90 per gallon according to figures from the American Automobile Association. Gasoline prices are also on an upward trajectory, having reached $4.1505 per gallon on September 7, a significant increase from $3.1971 per gallon recorded a year earlier.

Data reported by John Kemp indicates that hedge funds have transitioned from short to long positions, accumulating a net long position of 177 million barrels across the most traded fuel contracts, specifically gasoline and diesel, as of September 1. In contrast, their net position in crude oil remains slightly bearish, despite the resurgence of hostilities in the Middle East and mutual attacks on tankers. Analysts suggest that the bullish stance on fuels is likely to persist in the coming weeks. The primary driver of this outlook is the inability to replace lost output from the Middle East and Russia with alternative supply, as there is insufficient production capacity elsewhere in the world. Consequently, US inventories of diesel and, more critically, gasoline, are expected to continue drawing down from already low levels.

The depletion of gasoline storage is partly a result of refinery production adjustments during the summer. In response to tighter supply conditions for jet fuel and diesel, refineries shifted their output mix, producing less gasoline. This necessitated the release of fuel from storage to meet demand. According to Kemp, current gasoline storage levels are at a critical point, and rebuilding these inventories will take considerable time. The situation is further complicated by the upcoming refinery maintenance season. While this does not imply a simultaneous halt in operations across all facilities, it will result in a dip in total output over several weeks. Meanwhile, the conflict in the Middle East shows no signs of abating. Brent crude prices have climbed closer to $100 per barrel, while West Texas Intermediate topped $93 per barrel. These market dynamics suggest that elevated prices at the pump are likely to remain a persistent feature of the current economic landscape.