Commodity Tracker: 5 charts to watch this week

This week's Tracker looks at trends in global agriculture and biofuels, as supply-demand fundamentals support grains prices, dry bulk freight rates spike and uncertainty persists around US biofuels blending mandates. Plus, gas-to-oil switching in Asia and the latest indicators on European air traffic and jet fuel demand.

1. 1. Supply concerns, export curbs support global grains prices

What's happening? South America remained a big focus of the agriculture industry in late 2020, with weather, production and supply developments driving a huge rally in the grain markets. In Argentina, after several back-and-forth decisions on a corn export ban, the government reversed its decision Jan. 12 after a series of strikes paralyzed the agriculture economy. Further soybean and corn production cuts in Brazil due to dry weather have raised fresh supply concerns, while last week the US Department of Agriculture sharply slashed US corn(opens in a new tab) and soybean(opens in a new tab) yields and ending stocks, taking the markets by a surprise.

What's next? On the buy side, besides rising demand in other Asian nations, China's voracious grain demand growth is adding pressure. As a result, an apparent mismatch between supply and demand is expected to support grain export prices in the coming weeks. As of Jan. 13, prices of corn and soybean delivered into Northeast Asia and China have already risen 13.7% and 15%, respectively, over the past month. After Russia's announcement of grain export curbs starting February, markets will keep a close eye on trade measures as major grain producers aim to contain domestic food inflation amid expected limited supplies.

2. 2. Dry bulk freight rates spike on tight supply

What's happening? Freight rates have spiked to 14-month highs on major grains routes to Asia in January 2021, as a flurry of spot market fixtures met limited tonnage supply. Voyage rates on Panamax and Supramax class ships sailing from East Coast South America and US Gulf Coast ports to China reached their strongest levels since October 2019. The sudden rush of activity on fronthaul routes is attributed to pre-Lunar New Year buying in China, but the number of cargoes does not appear to be unusual. Instead, shipowners and operators say the rate increase is supply driven and a factor of increasing average ton miles, with ships taken out of the market for up to 80 days on these long-haul routes.

What's next? Rates held near the highs for several days, with shipowners resisting weakness in the paper market and forcing charters to step up their bids. Some shipbrokers in the Atlantic basin are struggling to find available tonnage for grains cargoes to Asia, and some anticipate congestion at receiving ports. With Brazil's soybeans export season set to pick up pace in late February and March, regional freight rates could see bullish support in the weeks ahead.

3. 3. US biofuels compliance market faces uncertainty amid presidential transition

What's happening? The cost of US biofuels compliance saw a volatile week amid conflicting reports about Environmental Protection Agency plans in the final days of the Trump administration. Renewable Identification Number prices spiked late in the week as reports emerged that the EPA would not grant small refinery exemptions to the federal biofuel mandate in the coming days despite earlier reports that exemptions were imminent. RINs, tradable credits that track production and use of alternative transportation fuels, had fallen sharply on Jan. 11 following the US Supreme Court's announcement that it would review an earlier decision from the 10th US Circuit Court that would have limited the number of EPA exemptions. The market was thrown into further uncertainty when the EPA opened public comment on four petitions to waive the 2019 and 2020 biofuel blending requirements for all refiners due to COVID-19.

What's next? The market remains in a holding pattern until a firm EPA announcement on biofuel blending mandates for 2021 and the petitions for 2019/2020 blending requirements, which will now be resolved after the Biden administration takes the reins. RINs could remain volatile as traders digest the possibility of small refinery exemptions if the Supreme Court favors refiners. Market participants will also scrutinize monthly EPA data due Jan. 21 to see if any exemptions were granted in the past month.

4. 4. Bangladesh taps oil for power gen, more fuel switching possible in Asia

What's happening? Bangladesh has started to switch from gas to oil for power generation. While power demand so far in January has been trending above year-ago levels, generation from gas-fired power plants fell by about 1.5 GW year on year, while S&P Global Platts Analytics(opens in a new tab) has observed an increase of 1.4 GW in oil-fired power generation on the year. The push from gas to oil is likely facilitated by the current tightness in the LNG market. Bangladesh has had problems obtaining bids for recent spot tenders of LNG, and is likely short on gas.

What's next? All Asian countries that import LNG face the same dilemma as Bangladesh. Beyond Japan, which has ample oil capacity, we see significant switching potential in South and Southeast Asia. In addition to Bangladesh, the most likely countries to switch from gas to oil are Pakistan and Malaysia. Platts Analytics puts the increase fuel oil demand due to switching in the 16,000-24,000 b/d range for January and February.

5. 5. European air traffic edges up but still far off 2019 levels

What's happening? European commercial air traffic showed signs of an uptick over the week to Jan. 13, averaging about 59% below 2019 levels in the second week of January compared with 60% a week earlier, according to tracking data from AirNav. Western Europe already has the highest percentage of lost airline capacity globally -- 65% below levels seen at the start of last year. European oil demand is forecast to have fallen 17%, or 1.5 million b/d, in 2020, with jet fuel and gasoline seeing the biggest falls in demand at 55% and 17%, respectively, according to S&P Global Platts Analytics.

What's next? The threat of extended lockdowns and travel restrictions in the region continues to focus attention on near-term demand expectations. Commercial air traffic is closely correlated to jet demand and Platts Analytics estimates Europe's jet/kerosene demand to have been 655,000 b/d lower year on year in December 2020. Market watchers are closely following the pace of vaccine roll-outs and infection rates to gauge the expected recovery path for jet fuel during 2021.

Reporting and analysis by Rohan Somwanshi, Sophie Byron, Timothy France, Hugo Mackay, Rob Perkins, Bruno Brunetti and Andre Lambine