Commodity Tracker: 5 charts to watch this week

Asian buyers are facing high energy costs due to currency depreciation, while Australia is looking at lower wheat exports on costlier fertilizer prices. The UK and China are looking long-term with updates on their respective net-zero strategies.

1. Weakening currencies leave Asian buyers vulnerable to higher energy costs

What's happening? Bank of Japan's recent commitment to target exceedingly low long-term government bond rates has led to a notable depreciation in its currency – about 10% this year. Other Asian currencies have also tended to weaken, with the Taiwan dollar being the next weakest currency, followed by the South Korean won. Many of the Asian exporters are keenly aware of having to maintain their export competitiveness against each other and so the weakening yen tends to have spillover impacts for their currencies as well.

What's next? Asian Central Banks are faced with either letting their currencies weaken along the lines of the yen, with the inflationary impacts getting imported into their economies, or raise their interest rates. Both responses will tend to temper domestic demand, though their export competitiveness would be supported by a weaker currency. With Asia largely being an energy importer, weakening currencies will drive imported energy costs beyond what has already been seen in the benchmarks Dated Brent for crude oil and JKM for natural gas. The future path for these exchange rates will impact energy and oil demand at the margin, along with inflation pressures.

2. UK's energy policy eyes large-scale renewables installations as it targets ambitious goals…

What's happening? The United Kingdom unveiled a national energy security strategy that specifies a large-scale build-out of non-fossil power generating capacity with the objective of delivering 95% of the country's electricity from zero emissions sources by 2030.

What's next? To achieve the objectives of the strategy, solar and wind capacity installations would need to average over 7 GW per year through 2035 and up to eight new nuclear plants would need to be considered for commissioning. S&P Global Commodity Insights in its latest Long-Term European Electricity Forecast projects non-fossil power generation delivering ~95% of the UK's grid needs by 2035, up from under 70% today. This should be a major contributor to declining direct CO2 emissions in the UK, which in the S&P Global reference case are projected to reach 35% of 2015 levels of 2050. Additional progress towards net-zero would require deeper penetration of alternative fuels in transport as well as a continued scale up of emergent technologies such as hydrogen, bio-energy, and carbon capture and storage.

3. … while China eyes slashing refined product exports to achieve net-zero aspirations

What's happening? China is speeding up efforts to eliminate exports of some transport fuels earlier than its 2025 target as part of its net-zero ambitions. The move will increasingly limit Chinese oil companies' ability to influence the global refined products market, Beijing-based sources told S&P Global Commodity Insights.

What's next? This move means that China is likely to lose a good opportunity to gain hefty profits from the current overseas market, where the oil products are in short supply. Moreover, Chinese refineries must adjust their product slate to lift fuel oil production as bonded bunkering is encouraged by Beijing, while cutting output of other oil products. Beijing is working toward ensuring the restricted oil export policy does not affect the supply of bonded bunkering fuel oil and bonded jet fuel for ships and flights going to international destinations, despite these supplies being counted as exports. In addition, the National Development and Reform Commission is believed to have highlighted the importance of keeping supplies to Macao and Hong Kong intact despite efforts to slow overall oil product exports. According to sources, only the cargoes shipped to Hong Kong and Macao will be allowed in the future, in addition to bonded fuel oil or jet fuel bunkering, which are deemed as exports.

4. Australia's wheat exports at risk of falling despite high global prices

What is happening? After two years of record wheat crop output in Australia, rising fertilizer prices are weighing on its wheat acreage. Soaring diesel and chemical prices are discouraging farmers to plant wheat for marketing year 2022-23 (October-September) despite strong export prices and favorable weather conditions. In MY 2021-22, Australia harvested 36 million mt wheat across 13.03 million hectares, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.

What is next? Australia is likely to export 25.3 million mt wheat in MY 2021-22, followed by a likely decline in MY 2022-23 to 20 million-22 million mt. A drop in wheat supply from Australia is significant as global wheat prices are sharply high. Analysts expect Australia's wheat acreage in MY 2022-23 to be between 12.6 million-12.9 million hectares, which could result in lower output, with MY 2022-23 wheat output seen at 26 million mt.

5. Geopolitical issues beyond Russia-Ukraine war further threaten OPEC+ spare capacity

What's happening? Nuclear deal talks in Iran are stuck over demands for the US to remove the Iran Revolutionary Guard Corps' terrorist designation. Attacks by Iran-backed groups in northern Iraq and southern Saudi Arabia also present notable risks to supply. In Libya, crude supply is likely around 750,000 b/d, well below 1.05 million b/d in February-March due to protestors shutting supply in mid-April.

What's next? OPEC+ spare capacity is set to fall to a low 1.6 million b/d by mid-year, raising the importance of growing bullish supply risks outside of Russia. Iran deal delays are raising the odds that 1.0 million b/d of assumed Iranian export growth by December could be removed from S&P Global's forecast, while a lack of a sustainable revenue-sharing deal in Libya creates risks of more sustained disruptions. Global supply losses are partially offset by historically large Strategic Petroleum Reserve releases, which will average nearly 1.4 million b/d in May-October from the US and other IEA countries.

Reporting and analysis by Alan Struth, Mark Mozur, Evridiki Dimitriadou, Glenn Rickson, Kerry Thacker-Smith, Oceana Zhou, Sambit Mohanty, Nareeka Ahir, Paul Sheldon, Sampad Nandy, Elizabeth Thang