Institutional traders are selling their fuel positions at the fastest rate since early March as a slowdown looms over much of the world. This is the latest sign that worry about the world's immediate economic future is deepening as Europe faces a very real recession and the Fed risks stagflation in its fight with inflation.
Reuters' John Kemp reported this week in his regular column that hedge funds and other market movers sold the equivalent of 8 million barrels of U.S. middle distillates and the same amount of European gas oil in the week to September 6 as slowdown clouds thickened.
Traders also sold the equivalent of 18 million barrels of Brent crude, 3 million barrels of WTI, and 3 million barrels of gasoline in the U.S.
When it comes to U.S. fuels, it's worth noting that gasoline prices have been falling for 13 weeks in a row. GasBuddy's Patrick De Haan tweeted that one in ten U.S. fuel stations now sold the fuel for $2.99 or less. This is very likely motivating more demand for gasoline, even in a bearish economic environment.
Middle distillates, meanwhile, remain in short supply in the United States. Reuters' Kemp again reported on that last week, saying inventories of middle distillates that were already low at the start of driving season were never replenished and remain critically low.
This is not very good news, even though local consumption of diesel and other middle distillates has flattened out at around 200,000 bpd below pre-pandemic levels. But exports are strong and about to become stronger after the European Union's embargo on Russian fuels comes into effect in early 2023.
When this happens, the EU would need to switch to another source for those fuels - and another source for crude oil, too - and the U.S. is one of the most obvious choices, if not the most obvious. Meanwhile, distillate inventories in Europe are at the lowest level since 2002, Kemp notes.
Speaking of the embargo, Bloomberg reported last week that it would spark a surge in the demand for tankers. Citing Danish tanker owner Torm, the report said that "The EU ban on Russian oil products from February 2023 will spark a recalibration of the oil trade ecosystem. Some of this trade recalibration has already started."
According to the shipping company, the demand for tankers will rise by 7 percent because of that recalibration. This means that tanker rates will rise, too, affecting the prices of the fuels carried by tankers around the world, effectively contributing to the energy inflation that is at the very heart of the overall inflation the ECB and the Fed are trying to rein in using potentially dangerous tactics.
Reuters reported this week that the Fed will likely announce its third 75-basis-point hike next week. This is one of the things that could have spooked oil traders, as some skeptics of the Fed's policy have warned the fast and sharp rate hikes could have the opposite of the desired effect.
The ECB, meanwhile, which recently hiked rates by 75 basis points, says that it has more hikes up its sleeve but will not implement them in such large doses as the outlook for the eurozone economy is perking up.
"We believe that the supply side, or source of this inflation, will abate, perhaps because of things happening in the U.S. and globally, and therefore prices of commodities and energy would subside," ECB Governing Council member Edward Scicluna told CNBC this week.
A reversal of inflation fortunes in both the U.S. and Europe could change sentiment among traders, but it is still questionable whether such a reversal will take place.
By Irina Slav for Oilprice.com
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