Gasoil Rally at Risk of Reversal as Speculative Bets Hit Ceiling, Citi Warns

Bullish bets on gasoil have reached a critical level that has historically preceded sharp price corrections, according to an analysis by Citi Research, signaling potential vulnerability in the product's recent rally.

This warning comes even as Brent crude prices climbed to around $89 a barrel in August, propelled by a series of geopolitical risks that have tightened the market for refined fuels like diesel.

Positioning Nears Historic Ceiling

Citi analysts flagged that speculative positioning in the key refined product is approaching a multi-year high, a development they believe could cap further gains. The bank's research points to managed money net length in ICE Gasoil futures, which is nearing the 100,000-lot range.

According to Citi, this level has historically acted as a ceiling for speculative interest. The bank noted that once this threshold is reached, net length has often reversed swiftly and sharply, suggesting the current rally is on unstable footing.

Geopolitical Tensions Underpin Prices

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The surge in bullish sentiment is rooted in real-world supply risks that have supported strong refinery margins and diesel cracks. Key factors cited by Citi include:

• Strait of Hormuz disruptions: Vessel traffic through the critical chokepoint fell to just eight on Tuesday, down from a pre-war average of 130-140, according to Kpler data cited in the report.
• Regional conflict: Houthi attacks have intensified in the Red Sea and against Saudi Arabia.
• Russian refinery strikes: Ukrainian attacks have continued against Russian energy infrastructure, including the Bashneft-Novoil and Slavneft-YANOS facilities, as reported by CNBC.

A Market Reversal in the Making?

Citi drew a parallel between the current crowded long trade in gasoil and the opposite market sentiment in crude oil during late June and early July. At that time, combined speculative net length in Brent and WTI was near a multi-year low, the market was heavily bearish, and some analysts were calling for prices to fall into the $50s or $60s.

A rapid escalation in geopolitical tensions quickly reversed that bearish trend, pulling prices and investor positioning sharply higher. The current extreme bullishness in gasoil may be similarly poised for a reversal, the bank's analysis suggests, should a catalyst emerge.