Commodity Tracker: 4 charts to watch this week

Eyes remain glued on developments in the Russia-Ukraine situation, and how tensions are affecting energy and commodity markets. Prospects for fossil fuels amid nuclear outages in France and Japan are also in focus.

1. Market shuns Russian barrels, while piling into Dated Brent

What's happening? Dated Brent, which reflects North Sea cargoes loading up to 30 days ahead, is firming considerably more than the ICE Brent contract. This is causing an unprecedented backwardation of $5/b between prompt Dated Brent and the ICE nearby contract. After the usual minimization of year-end stocks, refiners in Europe rebuilding a more normal operating stock cushion are preferentially seeking local and/or short-haul grades, with North Sea and Urals being the natural choices. Refining margin strength is also supporting the demand for prompt barrels. The tension between Russia and Ukraine has resulted in hesitancy to commit to Russian barrels for fear of sanctions, which has caused a sharp widening in the Urals discount, even against Forties – a relatively similar grade.

What's next? Depending on the evolution of the Ukraine-Russia situation, such strength on Dated Brent could evaporate if invasion risks are reduced. But it is also possible to see more buying pressure on prompt North Sea, if the situation escalates. Even so, the current state of Dated Brent will attract more US export barrels and possibly more West African barrels, which should help rebalance the market.

2. LME aluminum prices reach record levels amid supply tightness, global concerns

What's happening? The LME cash aluminum price reached an all-time of $3,312.50/mt Feb. 10, exceeding the previous record level seen in July 2008, in part due to a series of ongoing smelter curtailments across Europe. Bullish power prices and persistent supply chain issues are reducing the amount of available metal.

What's next? Market participants remain bullish despite the end cost of aluminum products such as primary and secondary aluminum increasing significantly alongside sustained increases to premiums. This is due to continued long queues for aluminum leaving LME warehouses at Port Klang in Malaysia, reducing the likelihood of the metal arriving in Europe, ongoing production cuts by Chinese smelters in response to emissions targets, and the uncertainty brought about by the tensions between Russia and Ukraine.

3. Outage issues for nuclear in France and Japan signal upside for fossil fuel generation in 2022

What's happening? Operators of Japanese nuclear power plants have published new maintenances, impacting output for the summer period. S&P Global Platts Analytics now assumes generation of 5.6 aGW across summer (April to September) – a 2.3 aGW year-on-year decline in output. Meanwhile, in France state power company EDF has lowered its 2022 nuclear output target for the second time this year, projecting to produce the lowest amount since 1991 – at a time when gas prices in Europe have been at record highs and end user power bills are lifting by as much as 50%. Platts Analytics assumes 2022 output at the top end of the new 295-315 TWh range.

What's next? In Japan, coal-fired power plants are expected to be highly utilized as generating electricity from coal-fired power plants will be more economical, especially for the first few months of summer. Coal-fired power generation should average around 30 aGW from April to July. Actual coal burn will depend on available power plant capacity, and there is still some uncertainty related to exact availability, because not all maintenances are published yet. In France, President Emmanuel Macron's announcement of plans for the country to build 14 new EPR nuclear reactors by 2050 underlines his intention to put nuclear – which dominates the French generation mix – at the heart of the country's energy transition plans. This comes at a time when neighboring Germany is on the brink of fully phasing out its own nuclear fleet. Platts Analytics expects nuclear generation in Western Europe to drop to half its current levels by 2050, as more plants close than are built.

4. LNG spot shipping prices plummet from all-time highs to near 52-week lows in about two months

What's happening? Seven-year low Russian gas flows to Europe pushed the European spot price TTF to all-time highs and forced the continent to import a record high of 413 million cu m/d of LNG in January. With Platts JKM spending an unprecedented amount of time at a discount to TTF, the lion share of Atlantic Basin supply remained within the basin, limiting the longer-route inter-basin trade and suppressing demand for spot LNG ships. As a result, LNG charter rates collapsed from their all-time highs of above-$300,000/d to $30,000/d in roughly two months.

What's next? The fate of Russian gas flows to Europe will be the primary determinant influencing the JKM-TTF spread and, therefore, the LNG spot shipping prices moving forward. While the de-escalation of the Russia-Ukraine conflict will undoubtedly improve the spreads and help pull the tanker rates back to the historical averages, the prolonged tension poses the main downside risk to the forecast.

Reporting and analysis by Sergio Baron, Alan Struth, Charles Thompson, Andre Lambine, Glenn Rickson, Ziya Cologlu.