The Heating Oil Short

As I expect some sort of deascalation/ good news from the Middle East, I have opened a short position in heating oil as it offers qutie a bit more downside if the energy complex begins to unwind. The physical crude market remains remarkably soft in the context of the disruption across Iran and Russia and I expect any de-escalation headlines around Hormuz to remove part of the geopolitical premium from oil. Heating oil has more room to the downside as on top of the crude price correlation it is carrying an exceptionally large refining premium caused by lost Russian capacity, restricted product flows and extremely low diesel inventories. https://preview.redd.it/cros29r9c3nh1.png?width=1080&format=png&auto=webp&s=ae9a163a9882055038d7a9699fc6f4d369bd9092 Diesel crack spreads remain massively elevated and show how much of heating oil’s price is currently being driven by refining scarcity rather than crude. On a side note crack spread is the price difference between a barrel of crude oil and the refined petroleum.. The supply response may now be starting as Chinese crude imports are increasing and state owned refinery run rates are turning higher and this supoprts crude demand at the margin because China needs additional feedstock BUT the more important effect for heating oil is the increase in refined-product supply. As more diesel enters the global market, the huge refining premium should begin to compress. US refiners also have a big incentive to maximise production as the profitability crated by this increase in prices has led to a massive rally in the energy companies as seen from the chart The index has gained about 175% since April last year with its latest YOY increase only comparable to the refining booms of 2005, 2013 and the recovery from the 2020 pandemic. https://preview.redd.it/svsx6wpac3nh1.png?width=1080&format=png&auto=webp&s=1fc3bdfa8a6740532e56c7593a9f8ff5bbd7c9eb Basically heating oil could be hit from both directions - crude falling as the geopolitical premium unwinds and the diesel crack narrowing as Chinese and US refiners respond to high margins Do note that the physical shortage remains real thus making it a very high risk trade and renewed escalation around Hormuz, further attacks on Russian refining capacity will hit the thesis. Also there was a rather big high conviction bearish flow for USO but again, approach this cautiously as positioning is winding down after $150. https://preview.redd.it/5ihyna6uc3nh1.png?width=764&format=png&auto=webp&s=e9ba1f93cf8aa4e36850aafebc6c4e320f40c0f6 Another way to paly this would be to go long crude and short heating oil as this is betting on the diesel crack narrowing. This would isolate the refining premium and reduce some of the geopolitical exposure, but it requires two legs and quite a bit more capital allocation to generate a proper return.