Column: European gas oil futures anticipate recession

Model of natural gas pipeline and EU flag, July 18, 2022. REUTERS/Dado Ruvic/Illustration

LONDON, Aug 8 (Reuters) - Hedge fund position changes last week in U.S. and European petroleum futures illustrate the contrasting economic outlooks on the two sides of the North Atlantic.

Hedge funds and other money managers purchased the equivalent of 3 million barrels in U.S. diesel futures and options in the week ending on Aug. 2.

In the three most recent weeks, investors have purchased a total of 13 million barrels, doubling their position to 26 million barrels.

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(Chartbook: https://tmsnrt.rs/3BOHmEH)

As a result, bullish long positions outnumber bearish short ones by a ratio of more than 3:1 which is in the 84th percentile for all weeks since 2013.

But on the other side of the Atlantic funds sold the equivalent of 1 million barrels in European gas oil futures and options.

Sales in the last six weeks have totalled 20 million barrels, reducing the net position to 40 million barrels from almost 60 million in mid-June.

The long-short ratio in European gas oil has fallen to the 47th percentile from the 92nd percentile six weeks earlier.

Elsewhere in the petroleum complex, fund managers last week sold NYMEX and ICE WTI (-19 million barrels) and Brent (-6 million) but bought U.S. gasoline (+6 million).

EUROPE FALTERS

Both the U.S. and European economies are slowing in response to surging inflation, supply chain disruptions, Russia's invasion of Ukraine and the sanctions imposed on response.

But while the U.S. economy still displays momentum, the major European economies are on the cusp of a recession, and the slowdown is likely to intensify as winter approaches and energy prices rise further.

Germany, France, Italy and Britain are all likely to be in recession before the end of the year, cutting their consumption of diesel in manufacturing, freight and construction.

European gas oil futures prices for the average of 2023 have fallen to less than $86 per barrel from almost $102 in mid-June as the economic outlook has deteriorated.

The calendar spread between December 2022 and December 2023 has softened to a backwardation of $11 per barrel from almost $33 six weeks ago.

Traders are anticipating Europe's economy will enter a relatively severe downturn that will reduce regional fuel consumption significantly over the next year.

Related columns:

- U.S. diesel shortage shows economy hitting capacity limit (Reuters, Aug. 4) read more

- Hedge funds bullish on U.S. diesel as inventories dwindle (Reuters, Aug. 1) read more

- Low U.S. oil inventories imply deeper economic slowdown will be needed (Reuters, July 28) read more

- Bargain-hunting hedge funds boost oil positions (Reuters, July 25) read more

John Kemp is a Reuters market analyst. The views expressed are his own

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Editing by David Evans

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John Kemp is a senior market analyst specializing in oil and energy systems. Before joining Reuters in 2008, he was a trading analyst at Sempra Commodities, now part of JPMorgan, and an economic analyst at Oxford Analytica. His interests include all aspects of energy technology, history, diplomacy, derivative markets, risk management, policy and transitions.