Hedge Funds Pile Into Fuels as U.S. Supply Squeeze Deepens

As the conflict between the United States and Iran continues, oil traders have shifted their perspective from bearish to bullish, focusing particularly on fuels in the United States. Despite the initial expectation that the war would be short-lived, the situation has escalated, with oil flows from Hormuz drying up. This has led to a fuel shortage in the United States, with refineries struggling to meet demand due to a decline in the number of facilities and production limitations.

Diesel fuel is especially affected, with the diesel crack spread reaching record highs in both the U.S. and Europe. In August, diesel prices in the U.S. hit an all-time high of over $5.81 per gallon, while gasoline prices climbed to $4.15 per gallon on September 7, up from $3.20 per gallon a year ago. Speculators, who previously had a bearish outlook, are now bullish on fuels, with hedge funds accumulating a net long position of 177 million barrels in gasoline and diesel as of September 1.

This bullish trend is expected to persist, as replacement output from the Middle East and Russia will be insufficient due to limited production capacity elsewhere. U.S. inventories of diesel and gasoline, already low, will continue to dwindle, with refinery maintenance season and the end of the Middle East conflict not providing immediate relief. Gas prices are expected to remain high, impacting consumers for an extended period.