Hedge funds have built record bullish positions in the middle distillates used as heating oil and diesel fuel – even as they become more cautious about the outlook for crude following a blistering rally.
Hedge funds and other money managers had amassed a record net long position of 92 million barrels in U.S. heating oil futures and options and 137 million barrels in European gasoil by Jan. 2.
Portfolio managers boosted their net long position in heating oil by almost 10 million barrels and their net long position in gasoil by 0.8 million tonnes or about 6 million barrels.
There were few changes in other parts of the petroleum complex, according to position data published by regulators and exchanges (http://tmsnrt.rs/2D5Onkn).
Net long positions in gasoline rose by 2 million barrels to 81 million. Net longs in Brent were up by 4 million barrels to a new record of 565 million.
In contrast, net long positions in WTI fell by 6 million barrels to 455 million barrels down from a record 461 million the previous week.
Increased bullishness towards middle distillates therefore accounted for all the increase in net long positions across the six major contracts in the petroleum complex.
Growing bullishness towards mid-distillates masked a more wary approach to crude and other refined fuels in the week to Jan. 2.
Portfolio managers have solid fundamental reasons to think middle distillate prices and refining margins will increase further in 2018.
Distillate consumption, which is closely linked to industrial activity and freight movements, is growing rapidly as a result of the synchronised global economic expansion and faster growth in world trade.
At the same time, refiners are struggling to make enough to meet demand. U.S. distillate stocks fell by 24 million barrels over the course of 2017, the largest annual drawdown for at least a decade.
Exceptionally cold weather across the major population centres of the central and eastern United States since the start of the year has boosted consumption of heating oil and threatens to draw down stocks even further.
The most intense cold is concentrated in parts of the northern and northeastern United States that
rely most heavily on heating oil to warm homes and offices and as an auxiliary fuel for power stations.
The winter heating season has not yet reached the half-way point in the United States and already heating demand has been much higher than in the two previous years, though still slightly below the long-term average.
Even before the recent burst of cold weather, U.S. stocks of distillate fuel oil
had fallen below the 10-year seasonal average.
Distillate stocks therefore start the new year in a depleted state and likely to tighten further if industrial activity and global freight movements continue to rise.
But the concentration of positions in U.S. heating oil and European gasoil has become a significant source of downside risk if they attempt to realise some of their profits.
Funds hold 10 long positions in U.S. heating oil for every short one, the most lopsided positioning for more than seven years since November 2010.
Positioning in gasoil looks even more stretched, with the ratio of long to short positions climbing over 16:1 and closing in on the record of 19:1 set in early October.
By John Kemp