A worrying signal from oil traders of 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 spiciness. The reality of a recession, however, is impossible to redefine. In Europe in particular, consumers are feeling the slowdown in economic growth in their wallets, as are retailers. There is, however, a big difference between the two. When a recession looms, consumers curb their spending. Traders, meanwhile, are starting to sell.

John Kemp of Reuters reported in his latest column on hedge funds, hedge funds and other institutional traders have sold the equivalent of one million barrels of European diesel futures over the past three weeks. Although it may not seem like much, in the last six weeks total sales have reached 20 million barrels. A significant reduction in the net position of traders.

Across the Atlantic, hedge funds and money managers have been buying U.S. diesel futures and options, increasing their position by 13 million barrels in the past three weeks. Kemp suggests that this is a signal that the economic outlook for US traders is better than that of their European peers.

U.S. traders may just be looking to cash in on the diesel shortage Kemp himself wrote around earlier this month. He noted that inventories of distillate fuel in the United States have fallen to critical levels and that it would take a recession to remedy the situation by destroying demand. Otherwise, diesel prices will only continue to rise and traders will buy diesel futures.

Be that as it may, the danger of recession in Europe is certainly much more serious from an energy point of view. Unlike the United States, which is rather self-sufficient in natural gas, Europe has proven equally embarrassingly dependent on imports of this product. A gas rush followed, where Europe scours the world for friendly gas, under a spot contract, if possible. This has not always been possible.

As a result, Europe is now diverting cargo from Asia, which is not making friends there, and trying to consume less energy. Thanks to excessive prices, it consumes less energy. Germany is preparing to ration energy for industrial users and encourage household austerity. Spain requires air conditioners to be kept at 27 degrees or higher. And Norway just announcement that it would limit its electricity exports to the EU.

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Norwegian electricity is normally routed to the UK, Germany, the Netherlands and Denmark. However, hydropower generation, which accounts for the bulk of Norway’s total electricity production, has been low this year, and the country is trying to achieve local self-sufficiency. More bad news for struggling Europe, where renewable energy production remains uneven.

The picture isn’t pretty, and earlier this month the IMF signaled that it could get even worse as it informed European governments must pass additional energy costs on to consumers to encourage energy savings. The fund argued that the financial aid only keeps energy consumption high when it should go down.

Meanwhile, Nomura analysts recently provide that the Eurozone, along with the UK, US, South Korea, Australia and Canada, are among the countries facing recession in 2023.

“Right now central banks, a lot of them have moved to an essentially single mandate – and that’s to bring inflation down. The credibility of monetary policy is too valuable an asset to lose. They’re going to so be very aggressive,” Nomura’s head of global markets research, Rob Subbaraman, said last month.

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

Reuters’ Kemp predicted that at least four European economies will fall into recession before the end of the year. Unfortunately, these are the big four – Germany, France, Italy and Britain – which means the pain will also be felt across the bloc and the rest of Europe. The silver lining: Fuel prices could start falling once a recession sets in.

By Irina Slav for Oilprice.com

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