After the recent profit-taking on higher oil prices prompted by China’s reopening, traders are once again crowding oil and fuel futures and options. The reasons: China, again, and hopes that the global economy can avoid a recession. But there’s also a third reason—low fuel inventories.
On February 5th, the European Union will impose an embargo on Russian fuels. Russia is the EU’s biggest fuel supplier, and there are what seem like serious doubts that the EU will be able to replace Russian diesel painlessly. Especially with U.S. inventories of the fuel that is the backbone of every economy also tight. What’s more, U.S. diesel inventories are about to get tighter as maintenance season begins.
Reuters’ John Kemp reported in his weekly column on hedge fund buying that purchases of crude oil and fuel futures surged to the most since November 2020—the month when the first vaccine for Covid-19 was announced, rekindling hopes of an economic recovery.
Yet not all of these purchases, not even most, were in diesel fuel. In fact, the bulk was in crude oil, to the tune of a total 44 million barrels, of them 40 million Brent crude. In fuels, large traders purchased the equivalent of 11 million barrels of U.S. gasoline, 8 million barrels of diesel, and 7 million barrels of European gas oil. This week, all will be watching the Fed and the ECB.
The two central banks are holding monetary policy meetings this week, and both are expected to reveal yet another round of rate hikes. However, expectations, at least for the Fed, are for a smaller hike, at 25 basis points, versus the earlier hikes of 50 basis points. The ECB is expected to continue aggressively, with a 50-basis-point hike, and so is the Bank of England.
Aggressive rate hikes are not conducive to greater oil demand or higher prices, so news that the Fed is slowing down with its efforts to tame inflation would be welcome. Conversely, an announcement of a rate hike greater than 25 basis points would likely deliver a shock to markets, as Reuters noted in a report earlier this week.
“A 25 basis point hike is likely baked into current oil futures prices, so the market will be looking out for Fed comments,” Americas oil news director at S&P Global Commodity Insights Jeff Mower told the Houston Chronicle.
“For instance, will the Fed hint at a pause in interest rate hikes, as the Bank of Canada did last week? That could prove bullish for crude oil futures,” he said.
A big part of the renewed bullishness of oil traders, however, has to do with the economic outlook for China and the United States. The reversal of the zero-Covid policy of the authorities in Beijing was like a starting pistol for oil traders after a year of lockdowns and uncertainty. Now, there are also hopes that the United States could avoid a recession, even though the latest manufacturing data suggests otherwise.
The International Monetary Fund this week reinforced these hopes revising its global growth outlook upwards, citing the surprisingly resilient demand in Europe and the United States. OPEC+, which is meeting this week, has no plans to change its production rates for now, which has also contributed to optimism.
Oil prices started this week with a loss, both because of anticipation of the central banks’ statements with regard to interest rates and because of continued strong Russian exports despite the EU embargo. Catastrophic predictions of output losses of above 1 million bpd, even up to 3 million bpd or more, have failed to materialize, but after the EU embargo on fuels kicks in, things could change.
This would be because, unlike crude, China and India will likely have a much lower appetite for imported refined products. And this, in turn, would mean that Russia would need to find new and smaller markets, which would lead to a tightening of global fuel inventories and, consequently, higher prices. Traders may be right in boosting their bets on fuels.
By Irina Slav for Oilprice.com