The oil market is changing its stance toward risk as ongoing conflicts in Iran and Ukraine intensify uncertainty surrounding the path of supply and pricing. According to Morgan Stanley, traders are increasingly abandoning long-term bets and shifting to shorter-duration futures, fearing that a new development on the war fronts could upend balances in the global oil market.
At the same time, hedge funds have flipped from short to long positions in refined fuels, building a net position of 177 million barrels in gasoline and diesel—an indicator that the market is preparing for an even tighter supply environment. "People have become more specific about the risks they are taking," said Brendan Ross of Morgan Stanley at the Asia Pacific Petroleum Conference in Singapore, according to Bloomberg. "They have decided what they really want and what constitutes an unpredictable loss," Ross added. Many traders are abandoning overly risky bets and concentrating on futures with closer expiration dates, as they do not want to be caught on the wrong side of long-dated positions amid high uncertainty surrounding the wars in Iran and Ukraine, according to the expert. This shift toward near-term futures has squeezed liquidity in longer-dated contracts, Ross noted.
The picture in the refined fuels market
At the same time, speculators and portfolio managers have recently accumulated bets in fuel markets, as these are displaying far greater tightness than the crude oil market itself. Hedge funds have shifted from short positions in fuels in early spring to long positions today, establishing a net long position of 177 million barrels across the most heavily traded fuel contracts—namely gasoline and diesel—as of September 1, according to the latest exchange data compiled by energy analyst John Kemp. The stance of speculators in refined fuels is likely to remain strongly bullish in the coming weeks, reflecting the inability to replace lost production from the Middle East and Russia with alternative supply sources, given the lack of sufficient spare production capacity in other regions. Consequently, inventories of diesel and, most notably, US gasoline will continue to decline from an already depressed baseline.
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