Bloomberg News

Hedge Funds Boost Diesel Bets With Supply at Decade Low: Energy

February 10, 2014

Hedge funds are the most bullish on diesel in almost five months as the coldest January in 20 years boosted demand and cut U.S. supply to the lowest in a decade.

Money managers increased net-long positions, or wagers on rising prices, by 29 percent in the week ended Feb. 4, the third consecutive gain, U.S. Commodity Futures Trading Commission data show. Long positions expanded by 5,016 contracts and short wagers fell by 1,020.

Prices for diesel, traded as a proxy for heating oil, rose to the highest since 2012 as frigid weather spread across the U.S. Northeast, leading to curbs on natural gas pipelines that boosted oil demand. Refineries beginning seasonal maintenance may cut production this month, further reducing stockpiles near New York Harbor that are already the lowest since May 2003.

“This is in reaction to cold weather supporting distillate demand and inventories continuing to decline as refineries get ready to go into turnaround,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “That’s supported prices and caused investors to get into the market.”

Ultra low sulfur diesel surged 6.24 cents, or 1.9 percent, to $3.2794 a gallon on the New York Mercantile Exchange on Jan. 31, the highest since March 2012. After the February contract’s expiration, March futures ended the reporting period on Feb. 4 at $2.9829 before rallying to $3.0503 on Feb. 7. Futures slid 5.22 cents to settle at $2.9981 a gallon in New York today.

Falling Supplies

Diesel jumped at the end of January on speculation that inventories near New York, the delivery point for Nymex contracts, would drop further from 15.7 million barrels, which was the lowest since April 2008, according to the Energy Information Administration, the statistical arm of the U.S. Energy Department.

Prices rose 5.98 cents to $3.1816 a gallon on Jan. 29, the first day of the report period, after Philadelphia Energy Solutions’ 355,000-barrel-a-day Philadelphia refinery lost power and decided to start early a planned turnaround on several units. Delta Air Lines Inc. (DAL:US) also began work at the Trainer site in Pennsylvania.

The fuel climbed another 9.78 cents over the next two sessions to $3.2794 a gallon on Jan. 31 on concern cold weather would linger. Below-normal temperatures were forecast from the Midwest to the East Coast from Feb. 5 to Feb. 13, according to the National Weather Service’s Climate Prediction Center.

More Cargoes

Futures slipped to $2.9829 a gallon on Feb. 4 on speculation cargoes arriving from Western Europe and Russia would replenish stockpiles, before rebounding to $2.9968 the following day after the EIA reported that inventories dropped 2.14 million barrels to 13.6 million in the week ended Jan. 31.

Tight supplies boosted spot prices in New York Harbor to 40 cents over futures Feb. 4, the biggest premium for prompt delivery in data compiled by Bloomberg that start in 2006. Residential heating oil in New York reached a record $4.482 a gallon on Feb. 3, according to the EIA.

Last month was the coldest January since 1994 in the contiguous U.S., based on gas-weighted heating-degree days, a measure of energy demand, according to Commodity Weather Group LLC. The U.S. Northeast is also on track for the coldest winter since 1982, measured from December to February, the group said.

“Simply put, people are keeping their length in heating oil because of the tight market,” said Tom Finlon, director of Energy Analytics Group Ltd. “There may be some nasty weather ahead that could keep the market tight a while longer.”

Distillate Demand

U.S. consumption of distillate fuel, including heating oil and diesel, rose to 3.99 million barrels a day in the four weeks ended Jan. 31, the most for this time of year since 2009, EIA data show.

Companies including Spectra Energy Corp. (SE:US) limited natural gas shipments to interruptible customers, who typically turn to oil as an alternative. There are more than 4,000 such customers in New York City, including hospital operators, commercial buildings and nursing homes, whose contracts allow suppliers to restrict gas deliveries, according to the New York Oil Heating Association.

“With so many interruptible customers in New York, you can see why it’s so devastating to supply when this happens,” John Maniscalco, executive vice president of the association, said by phone Feb. 7.

Net-long positions in Nymex ultra-low-sulfur diesel held by money managers, including hedge funds, commodity pools and commodity-trading advisers rose by 6,036 futures and options combined to 26,861, the highest since Sept. 13.

Bullish Positions

In other markets, money managers cut bullish positions in gasoline by 897 futures and options combined to 25,735, a fifth consecutive drop. Prices dropped 2.47 cents, or 0.9 percent, to $2.6031 a gallon during the reporting period.

Regular gasoline, averaged nationwide, rose 1 cent to $3.294 a gallon yesterday, the third consecutive increase, according to data from Heathrow, Florida-based AAA, the nation’s largest motoring group.

Net-long wagers in West Texas Intermediate oil, the U.S. benchmark, rose by 15,649 contracts, or 6 percent, to 275,931, the highest since Sept. 17. Long positions grew by 4,943, while shorts retreated by 10,706.

Crude slipped 22 cents to $97.19 a barrel in the CFTC report week. Prices climbed $2.04, or 2.1 percent, to $99.88 on Feb. 7, the highest settlement since Dec. 27.

Hedge funds and other money managers cut bullish wagers on Brent crude by 13,995 contracts. Speculative bets that prices will rise outnumbered short positions by 84,276 lots, the London-based ICE Futures Europe exchange said today in a report.

Gas Declines

Net-long wagers on four U.S. natural gas contracts tumbled by 20,927 futures equivalents, or 5 percent, to 397,445, the first decline in four weeks.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Natural gas futures rose 34.2 cents, or 6.8 percent, to $5.375 per million British thermal units on the Nymex in the period covered by the report.

“Distillate demand has been exacerbated by all of the interruptible natural gas customers that have been forced to turn to heating oil to make up their shortfalls,” Lipow said. “That’s further added support to the strength we’ve seen in prices.”

To contact the reporter on this story: Christine Harvey in New York at charvey32@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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Companies Mentioned

  • DAL
    (Delta Air Lines Inc)
    • $39.58 USD
    • -0.31
    • -0.78%
  • SE
    (Spectra Energy Corp)
    • $41.66 USD
    • 0.18
    • 0.43%
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