International commodity markets are full of little mysteries. For example: Why would a market player buy a whole bunch of something when the market is full of that very thing?
In this case, the thing is diesel fuel in Europe. The continent's last winter was mild, so there’s plenty in storage. Yet, according to Bloomberg, the bank Morgan Stanley has been on a huge buying spree.
The experts will tell you, nobody knows for sure. But they can guess: Maybe somebody thinks the conflict between Russia and the Ukraine will stop the flow of natural gas to Europe by winter, when demand goes up.
What does that have to do with diesel?
"If they can’t find natural gas, they’re going to have to find alternatives," suggests Phil Flynn, from Price Futures Group. "They’re going to use more coal, they’re going to use more oil..." and maybe some more diesel.
So, buy low now, sell high later.
That is unless prices don’t go up, like if next winter is really mild, or natural gas supplies are okay, or both. Then you lose money.
Risking your own money is called trading “naked,” which energy consultant David Bellman thinks is unlikely in this situation. Instead, he suggests, Morgan Stanley may be acting as an agent for end-users like governments or companies.
"They could be agents for multiple people," says Bellman. "They could have found end-user A, end-user B, end-user C, and negotiated with all of them and said, 'Aren’t you concerned about Ukraine?'"
It could be a lot simpler than that. Energy economist and consultant Phil Verleger looked up diesel prices— and the price of diesel futures— while we talked on the phone. Turns out, you can sell a contract today to deliver diesel in January for a little more than the current price.
"You could buy the diesel, store it, sell futures against it, and earn a very nice return," Verleger says, "at a time when interest rates are essentially zero."
In this case, it’s the “storing it” that’s the hard part for most players, because of the glut. If Morgan Stanley has some storage capacity, that could allow the bank to make money by buying something that nobody else wants.