Diesel rally fuels hedge funds' bullish oil bets at three-month high

Although crude oil positions have drawn attention, the more significant movement is in refined fuels, which have a more direct impact on inflation than the Brent crude figure. Diesel powers transportation, farming, construction and shipping, meaning price increases at the pump quickly affect wider economic costs. Record diesel prices at US pumps and the highest net-bullish diesel bets since March indicate the market expects extended tightness, not just a short-term surge. With gasoline positions also at their most bullish seasonal level ever, the overall refined products data points to mounting energy-driven inflation pressure even before any new escalation near Hormuz.

Crude positions reached a three-month peak, but the more notable development this week is the stronger rally in diesel and gasoline and the accompanying inflation danger.

Key data points:

• Net-bullish Brent positions rose by 37,837 contracts to 261,435 in the week ending 1 September, the highest level in over three months.
• US crude net-long bets climbed to their highest since June.
• Diesel net-bullish positioning reached its highest since March, with refined products gaining more aggressively than crude.
• On Thursday, US retail diesel prices set a record at $5.85 per gallon.
• Gasoline net-long positions jumped to 89,263 lots, the highest since December, and seasonal positioning is at a record bullish level for early September.
• The conflict now extends beyond Iran and the US; Iran has fired on Jordan, Kuwait and Bahrain, and Israel has threatened to attack civilian infrastructure if Tehran strikes.

Hedge funds are the most bullish on Brent crude since May, a Bloomberg weekend report noted, but the refined products rally, especially diesel, poses a more immediate inflation threat to consumers. In the week to 1 September, money managers increased net-bullish Brent positions by 37,837 contracts to 261,435, a three-month high, while US crude net-longs hit their highest since June.

Fresh hostilities between the US and Iran have heightened fears of extended disruption to energy traffic via the Strait of Hormuz. US bombing and Iranian retaliatory strikes on American bases have made it harder to resume normal shipping, and Iran has again started attacking vessels passing through the waterway, ending a period of slow recovery in traffic. Geographically, the conflict has expanded, with Iran launching attacks on Jordan, Kuwait and Bahrain, and Israel stating it would hit civilian infrastructure if attacked by Tehran.

In this context, refined products have risen even more than crude. Diesel has been squeezed by the concurrent conflicts in the Middle East and Ukraine, lifting net-bullish bets to their highest since March. On Thursday, US retail diesel prices reached a record $5.85 per gallon, directly impacting freight, logistics and consumer costs because of diesel's role in the physical economy.

Gasoline has followed a similar trend, with net-long positions jumping to 89,263 lots, the highest since December, as prices stay at record levels for early September. Seasonally, traders are rarely this bullish at this time of year, indicating that the rally stems from genuine supply worries rather than normal seasonal demand.

Overall, the positioning data suggests the market sees the current disruption as more than a temporary spike. With diesel and gasoline both at unusually high bullish extremes, the inflationary impact from energy markets will likely remain a pressing issue as long as the Hormuz corridor remains threatened.