Hedge Funds Pile Into Fuels as U.S. Supply Squeeze Deepens

Oil traders who had been largely pessimistic during the early months of the conflict involving the United States, Israel and Iran have swung to a bullish stance as fuel shortages emerge. Expectations that flows through key shipping routes would soon normalize have faded, and market participants are increasingly focused on tight supplies of refined products rather than crude alone. The squeeze is most acute in diesel. A combination of higher export volumes, producers’ cautious reactions to wartime price moves, and a long-term decline in U.S. refinery capacity has left domestic refining unable to keep pace with demand. Middle distillate margins — the price gap between crude and diesel — surged to record levels in mid-August in both the U.S. and Europe, reflecting the strain on supplies. Record-high retail diesel and rising gasoline prices have coincided with a major repositioning by speculators. According to commodity analyst John Kemp, hedge funds moved from net short to a collective net long of about 177 million barrels in gasoline and diesel contracts by September 1, even as their crude oil exposure stayed slightly bearish. Industry analysts including ING warned that, with disruptions to Middle Eastern and Russian exports, middle-distillate crack margins are likely to stay elevated and volatile. Looking ahead, market dynamics point to continued pressure on U.S. fuel stocks. Refiners shifted output toward diesel and jet fuel over the summer, which depleted gasoline inventories that will take time to rebuild—especially with the seasonal refinery maintenance period reducing processing rates for several weeks. With Brent trading nearer $100 a barrel and West Texas Intermediate above $93 earlier today, the combination of constrained supply, tight inventories and stronger speculative bets suggests elevated prices and volatility could persist. Reporting for this dispatch was drawn from Irina Slav at Oilprice.com.