If the global economy starts to grow more slowly, the impact will show up first in the price of refined fuels such as road diesel, marine gasoil and jet fuel that play a central role in the freight transport system.
Middle distillate fuels are principally burned in the high-powered engines used in trucks, railroads, ships, barges and aircraft to move freight around the world, as well as in factories, on farms and at mines and oilfields.
Mid-distillates account for more than a third of the oil used around the world every day, and are the single-largest category of refined products, (“Statistical review of world energy”, BP, 2018).
Distillate fuels are closely correlated with the global economic and trade cycle, and at the moment they confirm other indications the rate of growth is slowing.
U.S. distillate stocks, which had been drawing down faster than usual during the first four months of 2018, have now been building faster than normal since late May.
European gasoil futures prices, which had been in substantial backwardation, have shifted towards flat or even contango since the end of May, reflecting improved availability.
Gasoil futures still command a hefty premium over crude for deliveries in 2019, but the premium has been eroding over the same time frame.
In line with these trends, hedge funds and other money managers have become markedly less bullish on the outlook for distillate prices over the last three months.
Hedge fund managers have cut their bullish positioning in U.S. heating oil by 29 million barrels (33 percent) and in European gasoil by 53 million barrels (33 percent) since late May.
Over the same period, bullish positions in U.S. gasoline have been cut by 14 million barrels (12 percent), according to regulatory and exchange data.
Distillate markets are sending the same signal as a range of other indicators: the rate of global output growth has decelerated in recent months after a very strong expansion in 2017.