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After recent profit-taking on higher oil prices triggered by China’s reopening, traders are once again cramming into oil and fuel futures and options. The reasons: China, again, and hopes that the global economy can avoid a recession. But there is also a third reason: low fuel inventories.

5th Februarythe, the European Union will impose an embargo on Russian fuels. Russia is the EU’s biggest fuel supplier, and there are what appear to be serious doubts that the EU can painlessly replace Russian diesel. Especially with US inventories of the fuel that is the backbone of every economy also tight. Also, US diesel inventories are on the verge of shrinking as the maintenance season begins.

John Kemp of Reuters reported in his weekly column In hedge funds buying that purchases of crude oil and fuel futures rose the most since November 2020, the month the first vaccine for Covid-19 was announced, reigniting hopes for an economic recovery.

However, not all of these purchases, or even most, were for diesel fuel. In fact, the bulk was crude, with a total of 44 million barrels, of which 40 million were Brent crude. In fuels, the large trading companies bought the equivalent of 11 million barrels of US gasoline, 8 million barrels of diesel and 7 million barrels of European diesel. This week, everyone will be watching the Fed and the ECB.

The two central banks are holding policy meetings this week, with both expected to reveal another round of rate hikes. However, expectations, at least for the Fed, are for a smaller increase of 25 basis points, compared to previous increases of 50 basis points. The ECB is expected to continue aggressively, rising by 50 basis points, as is the Bank of England.

Related: UK oil boss: Fighting windfall tax led to missed opportunities

Aggressive rate hikes do not lead to higher oil demand or higher prices, so news that the Fed is slowing down in its efforts to rein in inflation would be welcome. Conversely, an announcement of a rate hike of more than 25 basis points would likely shock markets as Reuters indicated in a report earlier this week.

“A 25 basis point increase is likely to be factored into current oil futures prices, so the market will be watching for Fed feedback,” Jeff Mower, director of oil news for the United States, told the Houston Chronicle. Americas in S&P Global Commodity Insights.

“For example, will the Fed hint at a pause in raising interest rates, as the Bank of Canada did last week? That could prove bullish for crude oil futures,” he said.

However, a large part of the renewed optimism from oil traders has to do with the economic outlook for China and the United States. The reversal of the zero-covid policy by the Beijing authorities was like a starting gun for oil traders after a year of lockdowns and uncertainty. Now, there is also hope that the United States can avoid a recession, although the latest manufacturing data suggests on the contrary.

The International Monetary Fund this week reinforced These hopes are revising their global growth outlook upwards, citing surprisingly resilient demand in Europe and the United States. OPEC+, which meets this week, has no plans to change its production rates for now, which has also contributed to optimism.

Oil prices started this week with losses, both on anticipation of central bank statements regarding interest rates and on continued strong Russian exports despite the EU embargo. Catastrophic predictions Production losses of more than 1 million bpd, even up to 3 million bpd or more, have not materialized, but after the EU fuel embargo takes effect, things could change.

This is because, unlike crude, China and India will likely have a much smaller appetite for imported refined products. And this, in turn, would mean that Russia would need to find new and smaller markets, leading to reduced global fuel inventories and consequently higher prices. Traders may be right to raise their fuel bets.

By Irina Slav for Oilprice.com

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