Something quite extraordinary is happening in the futures market, as evidenced in the accompanying chart, which shows money manager positions in the three major CME Group futures and options contracts: WTI, Heating Oil and RBOB. What stands out is the seemingly unquenchable appetite for Heating Oil. Net speculative length (NSL) is highest in this contract. It is all the more surprising given the counter-seasonal nature of the development.

By the week ending July 29, financial investors had built up 41,200 contracts of NSL in Heating Oil, compared with 33,400 contracts in WTI and 24,700 in RBOB. This contrasts sharply with the net short position of 15,300 contracts observed in the corresponding week of 2024.

This unusual phenomenon is further illustrated by the substantial premium commanded by front-month Heating Oil over WTI. The crack spread stood at $34.27/bbl at the end of July, significantly stronger than the $23.94/bbl recorded exactly a year earlier.

There is no single reason for this nearly unprecedented strength in distillates. Rather, it appears to stem from a confluence of bullish factors: the ongoing OPEC+ production cuts (the first phase of which will be unwound by September), refinery closures and geopolitical developments, including sanctions on Russian oil exports and EU restrictions on imports of products refined from Russian crude.

The tightness in the middle of the barrel is also reflected in global distillate inventories. Combined stocks in the U.S., ARA and Singapore were 12% lower than a year ago and showed a 7% deficit to the longterm seasonal norm at the end of July. In the U.S., this shortage was 7% with absolute stocks at 113 million bbls, only 11 million bbls above the lowest level of the last 20 years.

Seasonally depleted distillate inventories raise questions about what to expect when the 2025 winter season begins. Below-average temperatures in the Northern Hemisphere – especially in the U.S. –could easily push inventories below 100 million barrels, further supporting refining margins for distillates. However, easing geopolitical tensions and the anticipated rise in OPEC+ crude exports (which yield a high proportion of distillates) might offset weather-related demand, causing the Heating Oil/WTI crack spread to drift lower despite the onset of winter.

Key indicators of such a shift in sentiment would be rising distillate inventories – not just in the U.S., but globally, together with WTI NSL regaining its spot as the preferred choice of instrument of money managers.