Commodity Tracker: 5 charts to watch this week

S&P Global Commodity Insights analysts are expecting a contraction in Russia's oil demand this year on the back of slower economic growth. Europe continues to buy Russian LNG, while stocks are looking healthy on the natural gas side. Also in focus this week are the rising costs of pig iron as well as the surge in VLCC rates to Asia.

1. Russia's oil demand to shrink in 2023

What's happening? Russia's economy shrank in 2022, mainly due to weakness in trade, manufacturing and transportation sectors, although the preliminary reports for GDP were much better than anticipated. According to the Russian Federal Statistics Service, the economy shrank 2.1% last year, although S&P Global Commodity Insights analysts estimate the contraction at 2.8%. Oil exports were largely undisrupted throughout 2022, except during the initial period after the invasion of Ukraine, with the West's bans on Russian oil imports only coming into force later on – for crude Dec. 5, 2022, and for refined products Feb. 5. Despite a contraction in 2022 GDP, Russian oil demand demonstrated resilience in 2022 with year-on-year growth of 165,000 b/d, in a large part supported by domestic consumption and military activities.

What's next? S&P Global expects Russian GDP to contract by 3% in 2023 amid continued weakness, especially in foreign trade and the manufacturing and transportation sectors. Accordingly, Russian oil demand is projected to decline(opens in a new tab) by 140,000 b/d or 3.8% in 2023, followed by a smaller contraction in 2024. S&P Global analysts expect all major products – gasoline, gasoil/diesel, and kerosene/jet – to contract in 2023.

2. Russia's LNG remains popular in Europe

What's happening? Russian LNG exports to Europe so far in 2023 have reached more than 3.7 million mt (5.1 Bcm) despite growing political opposition. Last year, European imports were up by a third against 2021, while at the EU level, no sanctions have been imposed so far on the import of the fuel. EU energy commissioner Kadri Simson on March 9 called on member states to stop buying Russian LNG and to not sign any new contracts with Russia once existing contracts have expired.

What's next? Russia has reaffirmed plans to bolster its LNG exports(opens in a new tab), targeting at least 100 million mt/year of export capacity in the medium-term. Novatek is also working to start up its second major project, Arctic LNG 2, with the first of three 6.6 million mt/year trains expected to come online in August. The second and third trains are due to follow in 2024 and 2026, respectively.

3. Robust loading demand drives Persian Gulf VLCC market

What's happening? VLCC rates for crude tankers have surged, with Chinese charterers leading the rush to book giant vessels as exports out of the US Gulf Coast and Persian Gulf rise. Platts, part of S&P Global, assessed the benchmark Persian Gulf-to-China route(opens in a new tab) basis 270,000 mt at w100 on March 13, which equated to $24.89/mt.

What's next? Market participants said it was difficult to predict whether the bull run will continue in the second quarter. Many refineries scheduled for maintenance in April and May. The ongoing Russia-Ukraine war as well as China's reopening after shifting away from its zero-COVID policy add to uncertainties in the market. However, new refineries are also coming online, which could support demand.

4. EU gas stocks at healthy levels after mild winter

What's happening? EU gas stocks are currently filled to a little under 60% of capacity, well ahead of the storage level a year ago of some 27%, following a mild winter that saw a flat withdrawal/injection balance in late December and early January. The healthy stock levels have helped keep a lid on European gas prices, which have come down sharply from their record highs last summer.

What's next? A cold end to winter in much of Europe has seen stock levels come down in the past few weeks, but with the start of the injection season looming, the state of storage in Europe is set to remain robust, with reduced filling demand this summer compared with last summer. It appears likely that stocks will be filled to the 90% target ahead of the Nov. 1 deadline set by the EU.

5. Europe steel mill pig iron costs rise on higher coking coal prices

What's happening? European steel mill pig iron production costs have remained elevated due to higher coking coal prices. Pig iron costs are based on a basket of iron ore grades such as sinter, pellets and lump used by Northwest Europe mills, along with coking coal costs adjusted for a range of qualities and pulverized coal injection use.

What's next? European steel producers' pig iron costs may remain supported by higher reference iron ore prices and strong coking coal prices. Weaker iron ore contract pellet premiums in Q1 2023 allowed European mills to cut costs at a time of a recovery in demand with blast furnace restarts(opens in a new tab) and rebounding pig iron rates. Sanctions and restrictions on Russian coking coal, PCI, met coke and thermal coal may continue to lead to stronger demand for alternative seaborne materials in some regions.

Reporting and analysis by Naing Oo, Alan Struth, Hassan Butt, Vickey Du, Stuart Elliot, Hector Forster