By: Reuters – Hedge Fund managers anticipate an imminent recession that will hit consumption of middle distillates such as diesel especially hard, based on recent position changes in futures and options markets.
Hedge funds and other money managers sold the equivalent of 8 million barrels in the six most important petroleum-related futures and options contracts in the week to Sept. 20.
Funds have sold a total of 186 million barrels over the 16 weeks since the start of June, according to records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
The total position has been reduced to just 444 million barrels, in only the 22nd percentile for all weeks since 2013, as funds have exited the market.
The most recent week saw purchases of Brent (+6 million barrels), NYMEX and ICE WTI (+3 million), and U.S. gasoline (+2 million) but sales of U.S. diesel (-3 million) and European gas oil (-15 million).
Middle distillates such as diesel and gas oil are mostly used in freight transportation, manufacturing, and mining, so they are heavily geared to the business cycle.
Fund managers have cut their position in mid-distillates in each of the last three weeks by a total of 39 million barrels as fears of a recession have intensified.
OPEC+ and top U.S. shale producers are expected to respond to any significant and sustained drop in prices by reducing their production, which may offer some support for crude prices in the short term.
Distillate markets have no such influential market managers and are expected to see a large accumulation of fuel inventories as part of the inevitable rebalancing process associated with a business cycle downturn.
Bullish long positions in distillates still outnumber bearish short ones by a ratio of 2.28:1 (49th percentile) but that is down from 3.68 (61st percentile) on July 5 and 4.98:1 (77th percentile) on June 14 as the likelihood of a recession has increased.