Hedge funds are betting crude oil stocks will adjust quickly to the aftermath of Hurricanes Harvey and Irma but gasoline and distillate inventories may take more time to normalise.
Hedge funds and other money managers increased their combined net long position in the five major petroleum contracts linked to crude, gasoline and heating oil by 46 million barrels in the week to Sept. 5, according to the latest regulatory and exchange data.
Fund managers recovered some of their pre-hurricane bullishness after cutting net long positions in the petroleum complex by a total of 116 million barrels over the previous two weeks (http://tmsnrt.rs/2jhR0sX).
But position changes varied significantly between Brent and WTI, and between crude and fuels, reflecting the fact the hurricanes have hit refineries, distribution systems and motorists rather than oil wells.
Hedge fund managers have sharply increased bullish positions in U.S. gasoline, U.S. heating oil and European gasoil to multi-year highs.
Speculators anticipate shortages of road fuels and heating oil since many U.S. refineries are still offline or operating at reduced rates after extensive flooding.
Fund managers increased their net long position in U.S. gasoline by almost 17 million barrels to 66 million, the highest level since oil prices started
slumping in the middle of 2014.
Funds also increased their net long position in U.S. heating oil by 11 million barrels to 41 million barrels, the highest for 42 months.
Portfolio managers also increased their net long position in European gasoil by 2.8 million tonnes to 15.7 million tonnes, the highest since at least 2014.
U.S. refinery disruptions are expected to draw Europea
n gasoline to the United States
to meet the supply shortfall while curbing the counter-flow of U.S. diesel to Europe.
But while hedge funds see the impact on fuel supplies lingering for some time, they are more confident that crude producers will find a way around the refinery bottleneck.
Hedge funds raised their combined net long position in Brent and WTI by 18 million barrels to 600 million barrels.
Renewed bullishness towards crude helped reverse part of the 131 million reduction in net long positions over the previous two weeks.
Nearly all the position changes came from WTI, where hedge funds became much less bearish about the supply situations as refineries began to restart.
Hedge funds increased long positions in WTI by 11 million barrels while trimming short positions by 10 million barrels. Brent positions were almost unchanged.
Hedge funds still have significant short positions in WTI amounting to around 180 million barrels, after raising them from a recent low of 104 million barrels on Aug. 15.
Fund managers have only just started the process of covering those short positions and as they do it should contribute to upward pressure on WTI prices.
In the meantime, an unusually large gap has opened up between Brent and WTI prices since mid-August likely worsened by the disruption to so many refineries and export terminals along the U.S. Gulf Coast.
Brent for delivery in November 2017 is currently trading at more than $5.30 per barrel compared with similarly dated WTI (http://tmsnrt.rs/2eZMtdw).
But while the gap is readily understandable for near-term contracts, impacted by hurricane damage, there are also large price differences between Brent and WTI contracts stretching well into next year.
While Brent futures prices are trading in backwardation or flat through the rest of 2017 and 2018, WTI prices are still trading in a wide contango, creating a major arbitrage opportunity (http://tmsnrt.rs/2jguEIn).
Such large price differentials are unlikely to be sustainable and should narrow in the weeks ahead since they provide a strong incentive to export excess crude from the United States.
By John Kemp