Bullish Diesel Bets Spurred as U.S. Fuels World: Energy Markets

Hedge funds raised bullish bets on diesel fuel to the most in more than six months on speculation that exports will surge to record levels, driven by unprecedented gains in U.S. crude production.

Money managers increased net-long positions, or wagers that prices will advance, on U.S. ultra-low sulfur diesel by 8.2 percent to 38,361 in the seven days ended Sept. 3, according to the Commodity Futures Trading Commission’s Sept. 6 Commitments of Traders report. It was the most since Feb. 26.

Diesel prices have advanced 14 percent since reaching a 2013 low in April as gains from exporting fuel rose, pushing domestic stockpiles 14 percent below the five-year average. The profit to buy diesel in the U.S. Gulf Coast and ship it to Northwest Europe climbed to a six-month high of $18.12 per metric ton (5.92 cents a gallon) Sept. 4, according to data compiled by Bloomberg. U.S. exports of distillate fuel oil including diesel rose to an all-time high of 1.285 million barrels a day in June, the EIA reported Aug. 29.

“We’ve really become the refiner to the world,” John Kilduff, a partner at Again Capital LLC, a New York hedge fund focused on energy, said by phone Sept. 6. “The market is really ripe for U.S. refiners to capture this export demand. It lends a compelling narrative to being long diesel fuel.”

Fuel Prices

Diesel declined 4.54 cents, or 1.4 percent, to settle at $3.1183 a gallon on the New York Mercantile Exchange after closing at $3.1637 on Sept. 6. Futures fell 0.4 percent to $3.1483 a gallon in the week covered by the report.

The U.S. has become the world’s largest fuel exporter as refiners take advantage of crude pumped from shale formations such as the Bakken in North Dakota and the Eagle Ford in Texas. Domestic output rose to 7.621 million barrels a day in the week ended Aug. 30, the highest since October 1989, according to the Energy Information Administration, the statistical arm of the Energy Department.

A combination of horizontal drilling and hydraulic fracturing, or fracking, has boosted production of oil and natural gas, helping the U.S. meet 87 percent of its own energy needs in the first five months of 2013, on pace to be the highest annual rate since 1986, according to EIA data.

Diesel futures rose 1.5 percent to $3.2083 a gallon on Aug. 28, the first day of the CFTC reporting period, after the EIA said that distillate inventories, including diesel and heating oil, fell for the first time in four weeks, declining 316,000 barrels to 129 million.

Gulf Coast

The EIA reported on Aug. 29 that distillate exports from the Gulf Coast reached a record 992,000 barrels in June in data going back to 1981. Charters for tankers carrying gasoline or diesel from the Gulf Coast increased 22 percent from a year ago to 78 cargoes in August, according to shipping data compiled by Bloomberg.

Futures advanced 0.1 percent on Sept. 5 after a supply gain fell short of estimates. Stocks grew by 549,000 barrels to 129.6 million in the week ended Aug. 30, 14 percent below the five-year average, according to the EIA report. Analysts surveyed by Bloomberg predicted an increase of 600,000. Diesel rose 0.8 percent on Sept. 6.

Demand for U.S.-produced fuel is increasing as Europe’s economy recovers from a recession and the region’s refiners curb output as higher crude costs dent margins. Brent futures traded on London’s ICE Futures Europe have averaged $10.81 a barrel more than West Texas Intermediate, the U.S. standard, this year.

European Production

Europe, among the largest consumers of U.S. exports, will reduce processing by 1.3 million barrels a day in September and 1.6 million in October, Amrita Sen, chief oil market analyst for Energy Aspects Ltd., a London research firm, said by phone Sept. 5. The reductions are expected to boost profit margins for shipping distillates such as diesel from the U.S. Gulf Coast to Europe, she said.

“Exports should continue at the pace we’re seeing now because the demand is absolutely there,” Sen said. “Europe is facing widespread refinery run cuts and as long as they’re down, the spread will stay wide. Margins will be good.”

Including freight costs, the profit to buy diesel and ship it to Northwest Europe was $15.21 per metric ton on Sept. 6, according to data compiled by Bloomberg. Profits averaged about $8.03 a ton so far this year.

Profit Margin

The spread is the difference between first-month swaps for 10ppm diesel cargoes in Northwest Europe and the sum of ultra-low-sulfur diesel spot prices on the Gulf Coast, as compiled by Bloomberg, and first-month swaps for TC14, the route between the Gulf and Europe, based on Baltic Exchange data.

“A lot of bulls out there have an expectation that we’re going to see very strong demand this season,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, said by phone Sept. 6. “We’ve seen such a high rate of exports to Latin America and Europe. They’re consuming a lot and the U.S. is filling that void.”

Money managers, including hedge funds, commodity pools and commodity-trading advisers, raised bullish diesel wagers by 2,905 futures and options combined, the ninth increase in 10 weeks, according to the CFTC report.

In other markets, hedge funds cut net-long positions in WTI crude by 11,552 futures and options combined, or 3.6 percent, to 305,971, the CFTC report showed.

WTI Falls

WTI slid 47 cents, or 0.4 percent, to $108.54 a barrel on the Nymex in the week covered by the report. Futures climbed to close at a two-year high of $110.53 on Sept. 6. Futures declined $1.01 to settle at $109.52 today.

Money managers cut bullish bets on Brent crude by 7,057 contracts, or 3 percent, to 224,905 in the week ended Sept. 3, according to data released today from ICE Futures Europe.

Brent advanced $1.32 a barrel, or 1.2 percent, to $115.68 in the week covered by the report, and declined 2.1 percent today to $113.72.

Speculative gasoline wagers rose by 4,333 futures and options combined, or 6.9 percent, to 66,985, the CFTC report showed.

Gasoline futures dropped 16.95 cents, or 5.6 percent, to $2.8646 a gallon in the report week. Prices closed down 5.13 cents at $2.8024 today.

Regular gasoline at the pump, averaged nationwide, fell 0.1 cent to $3.57 a gallon yesterday, the lowest level since Aug. 28, according to Heathrow, Florida-based AAA, the largest U.S. motoring group.

Gas Bets

Net-long wagers on four U.S. natural gas contracts added 9,233 futures equivalents, or 3.6 percent, to 268,556, the highest level since the week ended July 30, according to the CFTC data.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Futures climbed 13.2 cents, or 3.7 percent, to $3.666 per million British thermal units during the report week before declining to close at $3.53 on Sept. 6. They were up 2.1 percent at $3.605 today.

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