Refined Product Tightness And Inflation Risk
EU diesel and jet fuel stocks at the end of 2025 averaged less than two months of supply. Governments are using tax and margin measures to cap fuel costs, raising questions about public finance credibility. More March inflation data from countries outside the Eurozone is due in the coming weeks, which may affect rate decisions. Policymakers are expected to avoid firm guidance because of uncertainty over prices and supply conditions. The outlook cited expects at most one further rate rise from the European Central Bank, the Bank of England and Sweden’s Riksbank. Norway’s Norges Bank has already indicated one increase. Looking back to early 2025, we were bracing for persistent inflation driven by surging energy costs, particularly in diesel. The expectation was for central banks to deliver at least one more rate hike to combat these pressures. However, the European Central Bank’s final hike came in mid-2025, and it has since cut its main deposit rate to 2.75% as of last month.Market Positioning Under Policy Uncertainty
The inflation picture has shifted significantly over the past year. While the headline Harmonised Index of Consumer Prices for March 2026 came in at a more manageable 2.1%, core inflation, which excludes energy and food, remains stubbornly high at 2.7%. This divergence complicates the outlook for the ECB, as the underlying price pressures have not fully abated despite a slowing economy. For derivative traders, this suggests positioning for uncertainty in the path of interest rates. Options on EURIBOR futures could be used to trade on the volatility, as the market is divided on whether the ECB will pause its cutting cycle due to sticky core inflation. The discrepancy between market pricing and the ECB’s cautious commentary creates opportunities in interest rate swaps. The acute diesel supply shortage we feared in early 2025 has eased, with European stockpiles recovering through the winter. Brent crude is currently trading near $85 per barrel, well below the crisis peaks but still high enough to exert pressure. Geopolitical risks in key global shipping lanes continue to keep a floor under prices, meaning options strategies to hedge against sudden energy spikes remain prudent. Furthermore, the fiscal credibility questions raised in 2025 by government fuel subsidies are now coming home to roost. With several Eurozone governments facing pressure to rein in their deficits under revived EU rules, there is less room for fiscal stimulus to support growth. This could increase volatility in EUR currency pairs, making long volatility positions in EUR/USD options an attractive strategy. Create your live VT Markets account and start trading now.
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