A troubling signal from oil traders about a European recession

recession has always been a politically sensitive word. Today, it has become so sensitive that some economists and politicians are trying to redefine it to make it lose some of its sting. However, the reality of a recession is impossible to redefine. Especially in Europe, consumers feel the slowdown in economic growth in their wallets, as do traders. However, there is one major difference between the two. When a recession threatens, consumers curb spending. Traders, on the other hand, begin to sell.

John Kemp of Reuters reported in his latest hedge fund column that hedge funds and other institutional traders have sold the equivalent of 1 million barrels of European gas oil futures in the past three weeks. While this may not seem like much, total sales have soared to 20 million barrels in the past six weeks. A significant reduction in the net position of traders.

On the other side of the Atlantic, hedge funds and money managers have been buying US diesel futures and options, increasing their holdings by 13 million barrels in the past three weeks. Kemp suggests this is a signal that US traders’ economic prospects are brighter than their European counterparts.

It may be that US traders simply want to take advantage of the diesel shortage Kemp itself is experiencing wrote about earlier this month. He noted that US distillate fuel inventories have fallen to critical levels and it would take a recession to rectify this by destroying demand. Otherwise, diesel prices will only continue to rise and traders would buy diesel futures.

Be that as it may, the danger of a recession in Europe is certainly much greater from an energy point of view. Unlike the US, which is quite self-sufficient when it comes to natural gas, Europe has shown that it is equally embarrassingly dependent on imports of the commodity. This was followed by a dash for gas, with Europe scouring the world for friendly gas, if possible under a spot contract. It has not always been possible.

As a result, Europe is now diverting loads from Asia, which makes no friends there, and is trying to use less energy. Due to high prices, it consumes less energy. Germany is Preparing for energy rationing for industrial users and encouraging austerity in households. Spain requires air conditioners to be kept at 27 degrees or higher. And just Norway announced that it would curb its electricity exports to the EU.

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Norwegian electricity normally goes to the UK, Germany, the Netherlands and Denmark. However, hydroelectric production, which makes up the bulk of Norway’s total electricity production, has been low this year and the country is trying to ensure local adequacy. More bad news for struggling Europe, where renewable energy output remains uneven.

The picture is not pretty, and earlier this month the IMF signaled that it could get worse advised European governments to pass on the extra energy costs to consumers to encourage energy savings. The fund argued that financial support will only keep energy consumption high if it should go down.

Meanwhile, Nomura analysts recently prediction that the eurozone, along with the UK, US, South Korea, Australia and Canada, are among the countries to experience a recession in 2023.

“Right now, many of them’s central banks have switched to essentially a single mandate – and that is to drive down inflation. The credibility of monetary policy is too precious an asset to lose. So they will be very aggressive,” said Rob Subbaraman, head of global market research at Nomura, last month.

Add to this aggressive central bank the equally aggressive stance the EU is taking in its standoff with Russia, and there is a recipe for recession.

Reuters’ Kemp predicted that at least four European economies will plunge into recession before the end of the year. Unfortunately, they are the four biggest – Germany, France, Italy and Great Britain – meaning the pain will be felt across the bloc and the rest of Europe as well. The silver lining: Fuel prices may start to fall once a recession hits.

By Irina Slav for Oilprice.com

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