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Hedge Funds Bet on Fuels Over Crude as Storm Trade Persists

Updated on
  • Wagers on rising diesel prices reach their highest since 2013
  • Gasoline stockpiles have biggest weekly draw on record

The post-Harvey buzz over fuels is making U.S. crude look like the poor stepchild of hedge funds.

Since the storm battered the heart of America’s refining industry last month, bets on rising gasoline and diesel prices have surged for three straight weeks to the most bullish in years. But when it comes to West Texas Intermediate crude, skepticism is prevailing.

It all boils down to where the supply glut is. While U.S. fuel stockpiles have plummeted -- with a record draw from gasoline storage tanks -- oil inventories rose as crude-processing plants in Texas struggled to get back on their feet. That’s prevented WTI from closing above $50 a barrel even though last week was the best for the U.S. benchmark since July.

“The numbers are an assertion that they view the fundamentals for those markets as the strongest in years," Tim Evans, a Citigroup Global Markets analyst in New York, said of the enthusiasm over fuels. “And that may be appropriate, given all that’s happened with the hurricane."

Harvey slammed into the South Texas coast on Aug. 25, sparking record-setting floods and forcing the shutdown of almost a quarter of U.S. refining capacity. Complexes run by Exxon Mobil Corp., Motiva Enterprises LCC and other fuel suppliers have been steadily returning to full operations since then.

The WTI net-long position, or the difference between bets on a price increase and wagers on a decline, slipped 7 percent to 157,891 contracts in the week ended Sept. 12, according to data from the U.S. Commodity Futures Trading Commission. Longs fell 5.2 percent, while shorts dropped 3.2 percent.

Meanwhile, the net-bullish position on New York-traded gasoline rose 4.5 percent to the highest in more than three years, and the one on diesel climbed about 12 percent to the highest in four. Those were more timid increases than the 30-plus percent jumps for both fuels in the previous two weeks, so the enthusiasm may be fading as the situation in the Gulf Coast goes back to normal.

Global Demand

The outlook for crude, on the other hand, improved somewhat last week after the International Energy Agency said it expects global demand to climb this year by the most since 2015, and the Organization of Petroleum Exporting Countries was reported to be discussing an extension of its output cuts.

That helped WTI temporarily spike above $50 on Thursday for the first time in more than a month, and again on Friday. Nevertheless, American crude stockpiles remain almost 90 million barrels above the five-year average for this time of the year, and that has kept a barrel of the U.S. grade about $5 cheaper than Brent crude. The discount to the global benchmark reached $5.79 on Sept. 8, the widest in two years.

Both WTI and Brent rose Monday, with the U.S. marker advancing 36 cents to $50.25 a barrel and the global benchmark gaining 15 cents to $55.77 at 9:39 a.m. London time.

“There’s really a rotation story if you look at the larger picture," Evans said. “It’s not that they hate WTI so much. It’s that they’re thinking that the Brent market is the stronger of the two and that the products have the stronger bullish argument as well. And that judgment seems heavily influenced by Harvey."

Investors also remain wary that the summer driving season is wrapping up in the U.S., according to John Kilduff, a partner at New York-based hedge fund Again Capital LLC. “The real test for that is coming up," he said in a telephone interview. “We’ll see now as to whether or not the numbers hold up."

— With assistance by Meenal Vamburkar

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