Commodity Tracker: 6 charts to watch this week

Saudi Arabia's crude oil exports and supply management are in the spotlight in this week's pick of energy and raw materials trends to watch. Plus, the UK's decarbonization drive, hydrogen in steelmaking, and developments in US natural gas and freight markets.

1. Saudi exports creep higher as market awaits next OPEC+ move

What's happening? Saudi Arabia drew again on its crude stockpiles to boost exports in January, even with its OPEC+ production quota easing, the latest figures from the Joint Organizations Data Initiative showed. The kingdom exported 6.58 million b/d in January, according to JODI data released March 18, an increase of 87,000 b/d from December. It was the seventh straight month that shipments have risen since a historic low of 4.98 million b/d in June when stringent OPEC+ production cuts were in effect, and the highest since April 2020.

What's next? The rise in exports to a nine-month high in January, however, came ahead of Saudi Arabia's unilateral 1 million b/d production cut for February, March and April to offset potential market weakness. With Saudi production falling from February, crude flows from the world's biggest exporter should also see a significant drop for those months. Global oil markets are now watching closely signs that the OPEC kingpin plans to start unwinding some of its output cuts to meet the expected recovery in oil demand as COVID-19 vaccines roll-out. OPEC+ ministers are next due to formally meet to decide output policy on April 1.

2. UK decarbonization plans leave green hydrogen proponents feeling blue

What's happening? The UK government announced funding of GBP171 million ($238 million) for nine industrial decarbonization projects across five clusters on March 17. The funds, for projects in Scotland, South Wales, Merseyside, Humber and Teesside, support engineering and design studies into carbon capture usage and storage and hydrogen infrastructure. Absent from the list of winners was the Gigastack green hydrogen project on Humberside. Indeed there is no place for electrolysis driven by renewables in this latest round of the competition, which leans heavily on the participation of oil and gas concerns in blue hydrogen projects, adding CCS to methane reforming.

What's next? Increased lobbying by the green hydrogen sector is underway following the competition. Sector association RenewableUK, which had called for 5 GW of electrolysis capacity by 2030, would not comment on the results, no doubt keeping its powder dry ahead of a full UK hydrogen strategy due later this year. But the writing is on the wall. Unlike continental Europe, where green hydrogen projects far outnumber those for blue, the UK places hydrogen in an industrial regeneration context. Large oil and gas concerns, in partnership with heavy industry and chemicals, are seen as best placed to deliver the thousands of jobs the government wants. And there is no doubt that, in the North Sea, the UK and Norway are sitting on a potential carbon store goldmine.

3. EU shows enthusiasm for green hydrogen-based steel, but costs remain key

What's happening? Steel made from green hydrogen electrolysis, supplied by renewable power, with iron ore pellets remains far more costly than steel produced from the blast furnace route, with the difference over Eur100/mt more, according to the European Commission. Cash costs for producing direct reduction iron (DRI) via green hydrogen and DR-grade pellets have been far higher than natural gas-based DRI, according to estimates by S&P Global Platts. This is due to the volume of hydrogen needed as well as renewable power prices, electrolyzer efficiencies and capex, using S&P Global Platts PEM hydrogen assessment prices in the Netherlands. Recently some of the key input costs for traditional steelmaking pathways - iron ore, power and gas—have risen, in turn driving up the cost of pig iron and DRI for steel as shown in the chart.

What's next? The EU wants to help make green steel more viable with policies designed to help narrow current cost differences, with the market awaiting increases in electrolyzer efficiencies and renewables capacity. The EU is promoting green hydrogen import supplies through investments, including in Canada and Saudi Arabia, and plans to support the steel industry. The Commission plans to implement a EU carbon-based tax on steel product imports, and will increase the scope of the EU's Emissions Trading Scheme.

4. US natural gas production set to remain strong through summer

What's happening? US natural gas production has experienced a sharp rebound in March after the unprecedented curtailments in February, which cut production by almost 20 Bcf/d. The rebound back above 92 Bcf/d, in tandem with lingering outages to refineries and petrochemical facilities in the Gulf Coast, have hampered industrial gas demand and contributed to surprise storage builds in the Southeast/Texas in recent weeks. In so doing, Henry Hub forward prices for the summer have fallen from a high of $3.00/MMBtu in late February to $2.60/MMBtu currently.

What's next? The surprising strength of US natural gas production looks poised to continue this coming summer. With oil prices hovering near $60/barrel and rates of return across major US oil plays healthy enough to incentivize new drilling, there remains upside risk to US associated gas production. As well, despite the recent sell-off at Henry Hub, a sample of the major dry gas producers in the Northeast and Haynesville reveals they have hedged roughly 70% of their 2021 natural gas production at $2.70/MMBtu, 10 cents/MMBtu above the current summer strip. This should help keep most operators immune to the recent dip in prices and ensure production momentum seen the past few months, especially in the Haynesville, continues most of the summer.

5. Low US Gulf Coast refinery utilization stifles diesel flows, reverses arb

What's happening? Americas clean tanker earnings are being severely squeezed by a reversed diesel arbitrage, as historically low US Gulf Coast refinery utilization negatively impacts exports. This is disrupting typical ultra low sulfur diesel flows to the US Atlantic Coast, resulting in exports by historical diesel importers Europe and Brazil to the USAC instead. Negative returns on the USGC-Northwest Europe ULSD arbitrage have intensified, reversing the typical flow of barrels intermittently in Q4 2020 and 2021. Resulting bloated USGC tonnage avails drove freight on the benchmark MR USGC-UKC/Brazil diesel routes down 12% and 8% to worldscale 72.5 and w112.5, respectively. Bunker prices are significantly contributing to the weak earnings, having increased by 30% in Q1.

What's next? If lockdowns keep USGC refinery utilization below 80% and non-US diesel demand low, the influx of clean tonnage will reinforce the tight lid on freight. Lower bunker prices could provide reprieve from pressured earnings, and easing pandemic restrictions could provide an opportunity to capture benefits from the strengthening Asian market.

6. Delayed Brazilian harvest season helps fuel steep rise in freight rates

What's happening? Atlantic Panamax time charter levels are surging to near pre-financial crisis levels, as delayed harvest and planting seasons in Brazil have disrupted the traditional seasonality of the grains freight markets. High low-sulfur marine fuel prices and low levels of spot tonnage in the Atlantic basin have seen freight rates on the key Santos-to-Qingdao route settle above $55/mt—the highest rate in more than a decade.

What's next? Further upside is expected throughout April, as grains charterers compete on price for scarce scrubber-fitted ships to help minimize their freight costs. Higher-than-expected US-sourced corn sales to China also mean that demand continues to skyrocket.

Reporting and analysis by Robert Perkins, Henry Edwardes-Evans, Hector Forster, Luke Jackson, Barbara Troner and Samuel Eckett