(Repeats April 24 column with no changes. John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2XKA8KZ
By John Kemp
LONDON, April 24 (Reuters) - Hedge funds are betting heavily on higher gasoline prices this summer, anticipating that refiners will struggle to produce enough gasoline to replenish depleted stocks while ramping up diesel output for the shipping industry.
Hedge funds and other money managers have accumulated 118 million barrels of bullish long positions in futures and options linked to U.S. gasoline prices compared with just 3 million barrels betting on prices falling.
Funds’ net bullish position in gasoline has more than doubled to 115 million barrels from 47 million at the end of January, according to position records published by the U.S. Commodity Futures Trading Commission.
Gasoline is the only part of the petroleum complex where hedge funds currently hold a more bullish overall position than before oil prices started to slump at the start of October 2018 (tmsnrt.rs/2XKA8KZ).
Funds’ long positions in gasoline now outnumber shorts by a record margin of 38:1, making them much more bullish than on crude (where the ratio is just 8:1) or U.S. diesel (where long and short positions are nearly equal).
Since the start of the year, U.S. refiners have reduced their crude processing much more deeply than at the same point in 2018 or 2017, according weekly statistics from the U.S. Energy Information Administration.
At the same time, refiners have prioritised the production of middle distillates used for road and railroad diesel, jet fuel and marine gasoil, at the expense of light distillates such as gasoline for motorists.
Refiners have been responding to price signals that have seen gasoline trade at an unusually large and prolonged discount to distillates in the last six months, with the price gap at times exceeding $20 per barrel.
However, as a result, U.S. gasoline stocks fell more than 15 million barrels between the end of 2018 and April 12, the largest seasonal decline for over a decade and more than seven times the 10-year average.
Refiners will have to ramp up crude processing and gasoline production over the next few months to reverse the drawdown in stocks and meet heightened demand in the summer driving season.
But increased gasoline production will compete head-to-head with the need to boost diesel output ahead of the introduction of new marine fuel regulations by the International Maritime Organization (IMO) from the start of next year.
The global economy has so far avoided falling into recession, and with the introduction of new IMO fuel requirements, consumption of diesel is set to continue rising.
U.S. refiners will have to process record volumes of crude this summer to meet growing demand for both light and middle distillates.
(As a result, crude consumption by U.S. and other refiners is expected to be very high in the second half of the year, which is one reason global oil inventories are expected to fall and crude futures are trading in backwardation.)
Even so, refiners may struggle to produce enough of both fuels, and an increase in gasoline prices relative to both crude and diesel may be needed to restrain consumption growth.
Hedge funds are betting a global scarcity of fuels will manifest itself in gasoline this summer, pushing prices higher, before tightness switches to distillates later in the year and into 2020.
The trade is already very crowded, however, and the large concentration of hedge fund positions is building up a future source of downside risk to prices when some portfolio managers try to realise their profits.
- Oil traders to Saudi Arabia: “show us the barrels” (Reuters, April 23)
- Iran sanctions decision rewards hedge fund oil bulls (Reuters, April 23)
- Hedge funds’ oil positions start to look stretched (Reuters, April 15)
- Oil traders wait to assess impact of IMO regulations (Reuters, March 27) (editing by David Evans)