Refined fuels gain edge as investors turn bearish on crude amid inventory shortages and drilling curtailment

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As the energy market grapples with shifting dynamics, portfolio investors exhibit a bearish sentiment towards petroleum, fueled by expectations of a business cycle downturn affecting petroleum consumption and prices in the remainder of 2023. In contrast, refined fuels, particularly gasoline and diesel, are anticipated to demonstrate stronger price resilience owing to tight inventories and increased refinery throughput.

Despite no significant change in the positions held by hedge funds and other money managers in the six major petroleum futures and options contracts over the week ending on May 16, a notable transition was evident. The net sale of 18 million barrels of crude oil was matched by purchases of an equal amount of refined fuels, indicating a preference shift.

Specifically, funds maintained a net position of 249 million barrels in crude, where long positions exceeded shorts by a 2.35:1 ratio. Conversely, in refined fuels, the net position held was a smaller 36 million barrels, but longs still outnumbered shorts by a 1.40:1 ratio.

Among refined fuels, gasoline is predicted to emerge as the top performer. This is primarily due to its consumption being less tethered to the industrial cycle compared to crude or middle distillates like diesel and gas oil.

Additionally, the outlook for U.S. gas prices saw a modest bullish turn. As low prices are beginning to limit drilling activities, surplus production is expected to gradually decrease, potentially balancing the market in the long run. Even though funds recently purchased 167 billion cubic feet, their position remains a moderate 47 billion cubic feet net long.

As drilling activities for both gas and oil start to wane, a reduction in the production of both gas-field gas and associated gas from oil-rich fields is expected. These evolving market dynamics and investor preferences are poised to reshape the energy landscape through the rest of the year.

Ref: (2023. May 2023) Financial News.