By Nell Mackenzie

LONDON Bullish gasoline positions have hit their highest since the day Russia invaded Ukraine and will almost certainly rise further if record Atlantic Ocean heat draws a hurricane into the Gulf of Mexico and disrupts refineries, investors and analysts said.

Many traders have been unnerved as crude markets were whipsawed by a banking crisis in the United States and inflationary pressures. Some have found better returns in refined products.

Gasoline prices usually rise ahead of the U.S. summer driving season.

This year's seasonal rally has been super-charged by a ten-week low in supplies caused in part by refinery outages in the US east and Gulf Coasts and strong exports to global markets from the United States, which typically imports from other countries to supplement its own production.

Already the strength of gasoline and gasoil has helped to reverse energy funds' losses following the banking crisis stirred by the March collapse of Silicon Valley Bank, according to figures from Societe Generale and calculations by Reuters.

Money managers in the week to Aug. 1 boosted their net long holdings of NYMEX RBOB gasoline futures to the highest since late February 2022. On a seasonal basis, this position is at a three-year high, data from the Commodity Futures Trading Commission shows.

Now traders are focusing on the weather, as Atlantic waters have climbed to the highest temperatures in 120,000 years, heightening the risk of storms.

Meteorologists in July increased the number of storms forecast for this year, although they have also said the combination of rising sea temperatures and the El Nino weather pattern has increased uncertainty.

A hurricane in the Gulf of Mexico in the U.S. Gulf Coast - where nearly half of US oil refining capacity is located - could damage oil refinery units, or cause refiners to temporarily shut them down until the storm passes.

Refinery outages caused by plant shut-ins or damaged equipment in that region would likely increase fuel prices.

Tom Kloza, founder of the Oil Price Information Service, said he multiples the category of the storm by itself and by itself again to find the minimum increase gas price a hurricane would cause.

"The Gulf of Mexico may be the biggest choke point (for oil product exports) this year if we get any disturbances and I think we're all going to be on tenterhooks this hurricane season," he said.

HEDGE FUND-FUELED TURNAROUND

Gasoline futures have risen around 14% this year, compared with a roughly 2% rise for U.S. crude futures. Fuel strength pushed gasoline margins to one-year highs around $40 a barrel in July.

"The gas crack has been propelled by CTA buying, as well as refinery outages in the US and because extreme heat meant lower refinery runs in Europe," said Vincent Elbhar, co-founder of hedge fund GZC Investment.

Commodity trading advisers (CTAs) use systematically programmed algorithms to track asset performance.

One of these computer-led funds, the roughly $8 billion Aspect Capital, considered gasoline futures were among the best energy asset performers in its Diversified Fund portfolio, a source said on condition of anonymity. The fund was up 4% for the year to end-June, according to Societe Generale. Aspect Capital declined to comment on the performance.

Active managers also benefited.

"Unleaded gasoline has been the top performing commodity within the petroleum sector year-to-date," said Eliot Geller, a partner at CoreCommodity Management, who declined to give detail on the performance.

July performance in CoreCommodity Management’s Founders Fund rose over 8%, a Barclays note said.

But now, hedge funds must decide whether to stick with these trades. To guarantee a profit, they need the rise in gasoline prices to be sustained until hurricane activity is confirmed.

"Look at the rally in gasoline and heating oil cracks over the last two or three weeks and you can see, everyone is positioned for a very interesting hurricane season," said Brent Belote, who previously traded at JP Morgan's oil desk and now runs his own $25-million hedge fund, Cayler Capital.

Cayler is up 24% this year, said a separate source with knowledge of the matter. Belote declined to comment.

Belote believes other refineries could shut down due to the effects of delayed maintenance.

Outages at ageing refineries hampered by a lack of capital expenditure and interest in renewable energies has underpinned gasoline prices, said a trader from the oil trading desk at Arion, a $100 million hedge fund.

But for gasoline to continue its rise against the price of crude oil, there needs to be a hurricane in the Gulf of Mexico, they said.

The El Nino weather pattern, which disperses the winds that whip up into Atlantic hurricanes, may divert storms away from the Gulf of Mexico.

Hurricanes anywhere else matter much less for energy prices, the trader said.

(Reporting by Nell Mackenzie, Additional reporting by Laura Sanicola in Washington; editing by Barbara Lewis)