The fading likelihood of a summer fuel demand boost is prompting more US refiners to hedge as a means of locking in profit amid the threat of run cuts.
(Bloomberg) — The fading likelihood of a summer fuel demand boost is prompting more US refiners to hedge as a means of locking in profit amid the threat of run cuts.
Commercial players, which include refiners, have increased their bearish short positions in gasoline to at least 200,000 contracts this year, according to the Commodity Futures Trading Commission. That’s up from an average of 180,000 in the second half of last year.
“Hedging activity has increased a great deal over the past few months,” said Vikas Dwivedi, a global oil and gas strategist at Macquarie Group.
The margin of profit refiners earn from turning a barrel of crude into fuels has sunk as the US and China show signs of economic weakness. Demand for diesel, often viewed as a proxy for industrial activity, is faltering globally. In the US, gasoline demand just tumbled by nearly 900,000 barrels a day as recessionary fears dampen hope for a blockbuster summer.
Ironically, hedging could compress margins further as fuelmakers protect earnings by buying crude paper and going short on gasoline and diesel. “Refinery run cuts may eventually be needed to rebalance both crude and product markets,” Dwivedi said.
With gasoline demand still below pre-pandemic levels, Aegis Hedging has been advising end users and refiners to prepare for the demand outlook to worsen.
Some fuelmakers are unhappy with the number they’re locking in, said Aegis Vice President of Fuels Zander Capozzola. But it’s “like trying to catch a falling knife.”
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