Traders Are Taking Advantage Of A Looming Fuel Shortage

• Traders are starting to take advantage of tight fuel stocks, with positions in diesel and gasoline among the highest in a decade.
• Traders boosted their positions in European gas oil by 14 million barrels and in U.S. gasoline by 5 million barrels.
• While gasoline stocks have been rising, refiners are working to boost distillate stocks which could lead to less gasoline production in the future.

After fears of a crude oil shortage, it was only a matter of time before traders started to take advantage of tight fuel stocks as well. And they have begun doing that: positions in diesel and gasoline are among the highest in a decade, according to Reuters’ market analyst John Kemp.

Traders bought the equivalent of 2 million barrels of U.S. diesel recently, also boosting their positions in European gas oil by 14 million barrels and in U.S. gasoline by 5 million barrels, Kemp said in his weekly column on hedge fund oil buying. The analyst added that hedge funds and other prominent market players had been net buyers across the six most actively traded oil contracts for six of the past seven weeks.

That there would be concern about fuel supply amid tight crude oil supply is only natural. In fact, the worry seems to be mild, for now. In the United States, the world’s largest market, gasoline stocks have been rising, which means there is no danger of a shortage. Yet middle distillate stocks have been falling for the last three weeks. And so have crude oil inventories.

Last month Kemp reported that U.S. crude oil stocks had declined in 56 of the last 81 weeks, shedding a total of 273 million barrels since their peak in July 2020, more than making up for a build of 204 million barrels during the first stage of the pandemic. The Reuters analyst called this a chronic undersupply that helped push oil benchmarks higher.

All this could be temporary: forecasts are that U.S. oil production will rise this year, and rise substantially. Exxon and Chevron alone plan to boost their output in the Permian Basin by 25 percent and 10 percent, respectively. Private shale players are also drilling more, emboldened by higher oil prices.

On the other hand, the global unease about oil supply, driven chiefly by OPEC+ and the inability of most of its members to ramp up production in line with original plans, might spill into fuels, especially as the OPEC+ underproduction extends.

There’s something else that could contribute to an even tighter oil supply, according to Kemp, and that is refiners trying to boost distillate stocks. This, Kemp explains, would require maximizing the output of middle distillates at the expense of lighter fuels such as gasoline and diesel, which would mean lower gasoline production but higher crude oil consumption by refineries. 

This could be yet another reason for oil prices to go higher still, with the number of analysts predicting Brent at $100 multiplying by the day. Some say the situation is unprecedented.

“I’ve been doing this 30 years and I’ve never seen markets like this,” Goldman Sachs’ head of commodity research Jeffrey Currie told Bloomberg this week in an interview. “This is a molecule crisis. We’re out of everything, I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it.”

“We’re in a precarious situation,” Troy Vincent, senior market analyst at DTN, told Yahoo Finance. “Especially as it pertains to OPEC’s spare capacity to be much smaller by the time we get to summer than what we’ve seen in many years.”

Bloomberg reported this week its Commodity Spot Index had risen to a record this year, driven in part by the surge in crude oil prices. The suggestion of fuel supply tightness will do nothing to calm the rally, it seems. If anything, it would further contribute to it.

If the current trend continues, the immediate future does not look good. Despite central banks’ efforts to tame inflation by raising borrowing costs, with commodities across the board getting more expensive, inflation will likely continue to plague economies.

By Charles Kennedy for Oilprice.com

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