Commodity Tracker: 5 charts to watch this week

COVID-19 impact on raw material demand is once again in focus this week, as South Korea's thriving medical manufacturing sector drives higher imports of condensate, a key petrochemicals feedstock. Plus, swift regulatory action from the Biden administration on US upstream permitting, a weak outlook for the Hong Kong bunkers sector, and more.

1. S Korea's medical manufacturing boom lifts Australian condensate imports

What's happening? Coronavirus-driven high global demand for medical equipment, cleaning chemicals and hygiene products has been a boon for certain petrochemical products and their feedstocks. In the case of South Korea, refiners and petrochemical makers have been making rigorous efforts to secure ample supply of base feedstock condensate and naphtha for downstream polypropylene output, over recent trading cycles.

What next? South Korean refiners and petrochemical makers are set to increase their reliance on Australian ultra-light crude supply. Asia's biggest ultra-light crude consumer is expected to import at least 10 million barrels from Australia in the first half 2021, up sharply from 3.95 million barrels in the same period a year earlier, according to South Korean petrochemical and refinery feedstock managers surveyed by S&P Global Platts.

2. US oil rig, frack crew count rises but new regulations create uncertainty

What's happening? The Biden administration Jan. 20 implemented a 60-day moratorium on all new leasing and permitting of oil and gas on federal lands. Then Jan. 27, the administration pushed through an executive order directing the Department of Interior to pause all new leasing on federal lands and water while the department does a full review of the oil and gas program. Companies stockpiled a significant number of permits ahead of the anticipated executive orders, in the hopes that these leases could still be drilled.

What's next? S&P Global Platts Analytics expects minimal short-term impact to US supply, as neither order impacts active leases or permits. For onshore operators, active permits – which are unaffected – are concentrated in federal lands encompassing New Mexico, the Bakken, and basins across the Rockies. The longer-term impact from a ban on new leasing would be to lower production in the Gulf of Mexico and Alaska, where operators focus on adding new leases near recent discoveries. In addition to methane regulations that the administration might pursue across the industry, a broader curtailment on permitting and drilling will need to be watched after the 60-day moratorium ends.

3. Cold snap to drive US Midwest gas storage withdrawal

What's happening? A spike in US Upper Midwest demand mixed with lower inflows and production freeze-offs should flip the natural gas storage surplus in the region to a deficit. Bakken Shale supply is expected to shrink at a time when areas around Chicago and Detroit will most need the support, increasing the region's reliance on gas in storage.

What's next? In 2020, a similar cold spell dropped Bakken production by 200 MMcf/d. Higher Midwest demand appears likely to persist based on forecasts for colder weather in February and sustain the upside risk to Chicago prices for the coming weeks.

4. Hong Kong bunker trade in doldrums despite competitive fuel price

What's happening? Hong Kong bunker sales are estimated to have dropped 30-40% in 2020 according to sources, due to the global demand slump in marine fuels, but also strict coronavirus-related restrictions imposed in the city-port, which since July 29 last year include a 14-day quarantine for ships calling for bunkers only. This has boosted bunker sales at rival Northeast Asian ports including Zhoushan and Kaohsiung. Even lower prices could not stimulate demand. In October-December 2020, Hong Kong delivered 0.5% sulfur marine fuel averaged $355.16/mt, S&P Global Platts data showed, versus the $381.64/mt average for the same grade at the Kaohsiung port and $363.36/mt at Zhoushan.

What's next? Despite a tax reduction introduced to aid the shipping sector in April 2020, bunker sales will take time to recover, sources said, especially with Zhoushan taking a growing slice of the region's bunker business. Zhoushan is nowthe eighth-largest bunker supplying port in the world, according to Zhoushan Bonded Bunker Fuel Association, and the port aims to exceed 10 million mt in bunker fuel sales in 2025, according city and provincial government documents.

5. New electricity link bearish for UK power prices – for now

What's happening? On Jan. 22 the IFA2 electricity interconnector between the UK and France began operations after a number of delays. So far, the 1 GW interconnector has delivered an average 0.8 GW of power from France, reflecting the premium in the UK power price. The link lifts total capacity between the UK and France to 3 GW, and total UK interconnection to neighboring markets to 6 GW.

What's next? S&P Global Platts Analytics forecasts IFA2 to deliver strong imports to the UK in the near term which will weigh on gas generation and power prices (which hit new highs earlier this month). But the increased interconnection raises the UK's exposure to a French market where price sensitivity to temperatures is high, so an extended cold spell could add upside pressure to UK prices. IFA2 is the first of two UK interconnectors scheduled to launch in 2021, with a 1.4 GW link with Norway (NSL) due online later this year.

Reporting and analysis by Philip Vahn, Fred Wang, Nathan Richardson, Surabhi Sahu, Atsuko Kawasaki, Su Ling Teo, Glenn Rickson, Brandon Evans, Parker Fawcett