Hedge funds turn bullish on European diesel as supply squeeze deepens

Hedge funds have become increasingly bullish on European diesel as a supply squeeze tightens, according to Bloomberg. Data from ICE Futures Europe reveals that short-only positions in European gasoil dropped to their lowest level in over two years last week, while bullish bets surged to their highest level since before the US-Iran conflict began.

Hedge funds trimmed 309 short-only contracts, reaching their lowest since July 2024, while adding 1,498 long-only positions, pushing gross longs to their highest level since the week prior to the US-Iran war. On a net basis, hedge funds now favor European diesel more than they have in roughly six months. This shift in sentiment is driven by a surge in diesel refining margins, tight supplies stemming from Middle Eastern crude exports, Russian diesel export restrictions, and recent Ukrainian attacks on Russian refineries.

The market shows no signs of a swift return to normalcy, prompting speculative investors to position for ongoing diesel price strength. The same bullish trend is observed in US diesel, with net-long bets on US gasoline also rising to their most bullish level since March 17, shortly after average US pump prices exceeded $4 a gallon for the first time during the conflict.

While gasoline supplies remain constrained, seasonal prices are at record levels, and refiners can increase distillate output by reducing gasoline production. Hedge funds' growing confidence extends to crude itself, with net-long positions in both Brent and West Texas Intermediate climbing, with Brent positioning reaching its strongest level since early June, even before a previously agreed truce between the US and Iran collapsed.