(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2yhWw5w
By John Kemp
LONDON, Oct 2 (Reuters) - Hedge funds have accumulated a record bullish position in middle distillates such as diesel, heating oil and gasoil, anticipating stocks will be relatively tight this winter.
Hedge funds and other money managers held a record net long position in U.S. heating oil futures and options equivalent to 62 million barrels on Sept. 26, according to regulatory data (tmsnrt.rs/2yhWw5w).
Fund managers’ net position has risen by almost 95 million barrels over the last 13 weeks, transforming a position that was net short by 32 million barrels as recently as June 27.
Fund managers have also established a record net long position in European gasoil futures and options equivalent to almost 18 million tonnes, up from less than 1 million tonnes at the end of June.
Stocks of mid-distillates have been dwindling since February as refinery problems and a strong synchronised upturn in industrial activity and freight demand around the world has caused consumption to exceed supply.
After two exceptionally mild winters in North America in 2015/16 and 2016/17, the coming winter is likely to be colder, on the balance of probabilities, in which case heating oil stocks could prove tight.
But hedge fund positions now appear stretched, with fund managers holding almost 5 long positions in heating oil and 19 long positions in gasoil for every short position.
Big concentrations of positions often precede an abrupt price reversal when fund managers try to realise some profits by closing them out (“Predatory trading and crowded exits”, Clunie, 2010).
Adding to the danger, refinery processing has picked up significantly over the last week as refineries along the U.S. Gulf Coast have returned to near-normal operations.
Margins remain exceptionally high which provides a strong incentive to maximise crude throughput and the yield to distillates.
Heavy run rates, if sustained, should reduce the prospect of distillate shortages this winter. The main unknown is the weather.
In response to the same refining problems and strong demand, fund managers have also amassed a large net long position in U.S. gasoline futures and options.
Hedge funds now hold a net long position of 71 million barrels in U.S. gasoline compared with a net short position of 21 million barrels in late June.
But bullishness on gasoline may already be peaking. The net position was trimmed very slightly by 175,000 barrels in the week to Sept. 26.
However, strong refinery demand to meet the need for distillates should continue to tighten the underlying market for crude, and hedge funds are becoming progressively more bullish.
Fund managers increased their net long position in futures and options linked to Brent and WTI by a further 99 million barrels to 794 million in the week to Sept. 26.
The increase in the net long position was the largest since December 2016, immediately after OPEC and non-OPEC announced production cuts.
The net position is now at the highest since March, and only 160 million barrels below the record set in late February.
The net long position in Brent is at a record 509 million barrels, surpassing the previous high of 508 million set in February.
In recent weeks, crude prices have been pushed progressively higher by a combination of long building and short covering with long positions up by 260 million barrels since late June while short positions have been reduced by 178 million.
Fund positioning in crude appears less stretched than in some refined fuels with long positions outnumbering shorts by just under 5:1.
But the position is becoming more lopsided and there is a risk of a pull back in prices if fund managers attempt to realise some profits after the recent rally in prices.
“Global trade upturn aids oil market rebalancing”, Reuters, Sept. 27
“U.S. heating oil market looks tight this winter”, Reuters, Sept. 22 (Editing by Edmund Blair)