Portfolio investors are on the brink of becoming very bullish about the price of diesel and other middle distillates, encouraged by low inventories and increasing expectations for a soft landing for the U.S. economy. Hedge funds and other money managers purchased the equivalent of 10 million barrels of futures and options on U.S. diesel and European gas oil over the seven days ending Aug. 8.
Fund managers have bought middle distillates in 12 of the most recent 14 weeks, increasing their position by a total of 126 million barrels since May 2. Funds held a net long position of 99 million barrels (77th percentile for all weeks since 2013) on Aug. 8 up, from a net short of 27 million barrels (6th percentile) on May 2.
Consumption of diesel and other distillate fuel oils is the most sensitive to the industrial cycle, given their widespread use in manufacturing, freight transport and construction. But inventories have failed to rebound significantly from their cyclical lows in the middle of 2022, and there is not enough spare refining capacity to boost them readily.
As a result, traders increasingly expect that a soft landing for the U.S. economy and resurgence of manufacturing and freight activity will quickly lead to diesel shortages re-emerging. Chartbook: Oil and gas positions
Elsewhere in the petroleum complex, the short-covering rally that had propelled Brent and especially WTI prices higher since the end of June ran out of momentum. Fund managers sold NYMEX and ICE WTI contracts (-2 million barrels) for the first time in six weeks since the end of June.
The sales were small, but came after the fund community had purchased a total of 135 million barrels over the previous five weeks. In the premier NYMEX WTI contract, short positions had been reduced by 91 million barrels or two-thirds since June 27.
With only 45 million barrels of short positions remaining, the potential for further short-covering to lift prices had been significantly reduced. U.S. NATURAL GAS
Investors are still trying to become bullish about the outlook for U.S. natural gas prices despite a persisting legacy of above-average inventories inherited from the winter of 2022/23. Hedge funds and other money managers purchased the equivalent of 292 billion cubic feet in the two main gas contracts over the seven days ending Aug. 8.
The purchases essentially reversed sales of 307 billion cubic feet the previous week and returned the net position close to where it had been in the last week of July. The total position has risen to a net long of 707 billion cubic feet (47th percentile for all weeks since 2010) up from a net short of 1,061 billion cubic feet (7th percentile) at the end of January.
There have been signs of a small deficit between production and consumption since the end of June, which has fuelled expectations that the market balance will tighten over the course of winter 2023/24. Working gas inventories in underground storage were still 202 billion cubic feet (+7% or +0.63 standard deviations) above the prior ten-year seasonal average on Aug. 4.
But the surplus had narrowed slowly but progressively from 299 billion cubic feet (+12% or +0.81 standard deviations) on June 30. The prospect of a sustained production-consumption deficit this coming winter has drawn fund managers into gas positions.
So far, however, the deficit signal has not been strong enough to encourage an outright bullish stance. Related columns:
– U.S. diesel prices surge anticipating a soft landing (Aug. 11, 2023) – Crude oil and fuels draw funds as sentiment shifts (Aug. 7, 2023)
– Short-covering by hedge funds lifted oil prices (Aug. 1, 2023) – Depleted U.S. diesel stocks attract hedge funds (July 20, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own (Editing by Jan Harvey)
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)