Investors have become very bullish about the outlook for gasoline and diesel prices, accumulating some of the largest positions in both fuels for a decade as economies begin their recovery from the coronavirus crisis.

Hedge funds and other money managers purchased the equivalent of 16 million barrels in the six most important petroleum-related futures and options contracts in the week to Feb. 1, exchange and regulatory data shows.

Steady Buyers

Portfolio investors have been buyers in six of the most recent seven weeks, and last week’s purchases reversed a roughly similar volume of profit-taking the previous week.

The most recent buying was concentrated on the fuels side, with purchases in European gas oil (+14 million barrels), U.S. diesel (+2 million) and U.S. gasoline (+5).

On the crude side, however, purchases of NYMEX and ICE WTI (+7 million barrels) were more than offset by sales of Brent (-13 million).

Fund managers have amassed a net position in the three fuels contracts totalling 225 million barrels (88th percentile for all weeks since 2013), up from 136 million barrels (59th percentile) on Dec. 14.

While U.S. gasoline inventories are in line with the pre-pandemic five-year seasonal average, distillate stocks are 26 million barrels (17%) below the average for 2015-2019.

Crude Processing Is Up

Rebuilding distillate stocks to more comfortable levels implies faster than normal crude processing rates at refineries and downstream equipment configured to maximize the yield of middle distillates at the expense of light ones.

Reversing the distillate shortage will therefore boost crude consumption, restrict the available supply of gasoline over the next few months and lift prices across the entire complex.

Fund managers hold a long-short ratio in middle distillates of almost 6:1 (83rd percentile) but more than 14:1 in gasoline (92nd percentile), illustrating how the distillate shortfall threatens to spill over into other fuels.

John Kemp is a Reuters market analyst. The views expressed are his own.