LONDON: Portfolio investors have continued to realise profits on formerly bullish diesel positions and begun to turn bearish as supplies adjust to the disruption of trade through the Red Sea and a mixed industrial outlook.
Hedge funds and other money managers sold the equivalent of 26 million barrels in the six most important petroleum-related futures and options contracts over the seven days ending on March 26.
Sales came after fund managers purchased 140 million barrels the week before, one of the largest increases in the last decade, according to position reports filed with exchanges and regulators.
But nearly all the latest week’s sales were in middle distillates (-24 million barrels), both US diesel (-8 million) and European gas oil (-17 million).
The reduction in distillate positions has coincided with a significant softening of gas oil and diesel prices compared with crude oil.
The premium for European gas oil over Brent crude had shrunk to roughly $168 per tonne on March 26, down from a recent peak of $274 on Feb. 9.
The premium for US ultra-low sulphur diesel over US crude had fallen to $28 per barrel from $48 over the same period. Despite attacks on tankers in the Red Sea and Gulf of Aden that forced the re-routing of diesel trade there has been no discernible tightening of supplies. US diesel inventories were about 14 million barrels (-10% or -0.86 standard deviations) below the prior ten-year seasonal average on March 22.
But the deficit has not worsened significantly from 11 million barrels (-8% or -0.76 standard deviations) at the start of 2024. The market has adjusted to the longer routes for diesel deliveries and the impact of Ukraine’s drone attacks on Russia’s refineries.
In the meantime, the outlook for a cyclical industrial recovery in the major economies to boost diesel consumption and prices has remained mixed.
Global freight flows appear to be strengthening after a long but shallow downturn between the middle of 2022 and the middle of 2023. Manufacturing in the United States and China also shows signs of increasing, but Europe’s industrial businesses have struggled to emerge decisively from recession.
Persistent inflation in the services sector has forced central banks to postpone anticipated interest rate cuts until the middle of the year or later.
In consequence, the expected tightening of distillate inventories has been pushed back and caused many fund managers to be more cautious in the short term.
Investors made few changes to gas positions for the third week running, after an earlier buying surge in late February and the start of March occasioned by the announcement of production and drilling cuts fizzled out.
Hedge funds and other money managers had reduced their net short position to 431 billion cubic feet (bcf) (20th percentile for all weeks since 2010) on March 26 from 1,675 bcf (3rd percentile) on Feb. 20.
In real terms, prices remain only a little above the multi-decade lows hit in mid-February. Announced drilling and output cuts should put a floor beneath them and the balance of risks is tilted to the upside in the medium term.
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