For the first four months of the war between the United States and Israel and Iran, oil traders remained largely bearish. The overwhelming expectation was that the war would end soon\u2014even as July rolled around\u2014and oil flows out of Hormuz would recover. Instead, the world is slipping into a fuel shortage, and traders have gone bullish.<\/p>\n
They are especially bullish on fuels in the United States, it seems. The world\u2019s biggest crude oil consumer and the biggest exporter of crude and fuels has not managed to avoid a supply squeeze at home, partly due to higher exports, and partly due to the oil industry\u2019s guarded response to the war-related oil price rise. Another reason for the tighter supply of fuels in the United States is the fact that there are fewer refineries now in the country than there were 30 years ago, for instance. Existing facilities simply cannot produce enough fuel.<\/p>\n
The supply situation is especially challenging in diesel fuel. So much has the diesel market tightened in recent months that the diesel crack spread, the pricing difference between a barrel of crude oil and the diesel refined from it, hit record highs<\/a> in both the United States and Europe in mid-August.<\/p>\n \u201cGiven disruptions to Middle East and Russian diesel exports, and with little sign of an imminent recovery, middle distillate cracks are likely to remain highly elevated and volatile, particularly as we move towards seasonally stronger demand,\u201d\u00a0ING\u2019s commodity analysis team wrote in a note<\/a> earlier this month.<\/p>\n Last week, diesel prices in the United States hit an all-time high<\/a> of over $5.81 per gallon, but that record fell fairly quickly, and diesel fuel is now selling for over $5.90 per gallon, according to AAA figures.<\/a> Gasoline is also climbing, selling for $4.1505 per gallon on September 7, up from $3.1971 per gallon a year ago. Related: Labor Day Gasoline Just Hit a Record. Here\u2019s What Comes Next<\/a><\/p>\n With these prices, speculators have forgotten their bearish mood from this spring and are flocking to oil and fuels. Hedge funds have gone from short to long, building a net long position of 177 million barrels across the most traded fuel contracts\u2014gasoline and diesel\u2014as of September 1, John Kemp reported in a recent column. In crude oil, their net position actually remained \u201cslightly bearish\u201d, the analyst noted. That\u2019s despite the reignition of hostilities in the Middle East with mutual attacks on tankers.<\/p>\n Speculators\u2019 position on fuels is likely to remain strongly bullish in the coming weeks, reflecting the impossibility of replacing lost output from the Middle East and Russia with alternative supply because there is not enough production capacity elsewhere. So, U.S. inventories of diesel and, most notably, gasoline, will continue to draw from an already low point.<\/p>\n The reason for this low point is that over the summer, refiners produced more jet fuel and diesel in response to tighter supply in those, which meant they were producing less gasoline, necessitating fuel releases from storage. Currently, the amount of gasoline in storage is at a critical level, according to Kemp. Inventories would take a while to get rebuilt.<\/p>\n In fact, they would take quite a while because refinery maintenance season is around the corner. While it does not mean that all refineries will stop operating at the same time, it does mean that there will be a dip in total output over several weeks. Meanwhile, the war in the Middle East shows no signs of approaching its end, with Brent crude<\/a> climbing closer to $100 per barrel and West Texas Intermediate<\/a> topping $93 per barrel earlier today. The pain at the pump is not going away anytime soon.<\/p>\n By Irina Slav for Oilprice.com<\/p>\n