Commodity Tracker: 4 charts to watch this week

Carbon emissions reduction drive China's steel production cut campaign and the US' soybean oil demand. Also, oil supply risks loom while European gas price curve trades at record highs.

1. M&A helps China to lower steel production

What's happening? The Chinese government has ordered steel mills to reduce production in a bid to lower carbon emissions. Enforcement has been more stringent this time compared to the previous years, but it remains to be seen if another steel price climb would incentivize higher production. S&P Global Platts Analytics observed that the lack of steel demand is a bigger factor on current production than the government's steel cut orders. Meanwhile, the merger of China's Angang Iron & Steel with Bengxi Iron & Steel, which was finalized Aug. 19, brings the combined crude steel production of China's top five steelmakers to around 27% of the country's total crude steel production, based on S&P Global Platts calculations.

What's next? Platts Analytics has lowered its steel production growth forecast for China for 2021 to around 2% from 8%. China has identified steel industry consolidation as a way of reducing overall steel production and lifting the quality of the sector. The country's Ministry of Industry and Information Technology wants to increase the ratio of China's top five steelmakers' output to 40% of overall production by 2021. The Angang-Bengxi merger will help to achieve this.

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2. US soybean oil supply likely to be tight in coming years

What's happening? US President Joe Biden's commitment to significantly reduce carbon emissions is likely to pressure US soybean oil supply in coming years as biodiesel production scales up in tune with rising demand for the alternative fuel. As a result, Demand for soybean oil from the US biofuels industry has been rising markedly since 2020. Out of total US soybean oil production of 25.7 billion lb in marketing year 2021-22 (September-August), the country's biofuels sector is projected to consume 11.5 billion lb, up 26% on the year, the US Department of Agriculture said in its latest supply and demand report.

What's next? US Energy Information Administration's projection of nearly 2 billion gallons of vegetable oil-based biofuel production by 2022, almost four-times the 2020 levels, is likely to put a lot of pressure on US domestic soybean oil supply. Almost half of US soybean output is generally processed into soybean meal and oil, with nearly 70% of bean oil used to produce biodiesel. However, soybean oil supply has risen by 1.1 million mt over the past five years, but on the other hand, domestic industrial use has hit roughly twice the supply increase, according to Platts Analytics. Overall, this could mean US bean oil exports could shrink to almost half of the level seen just two years ago. Platts Analytics is expecting US bean oil exports to reach 1.35 billion lb in MY 2021-22, sharply down from 2.8 billion lb in MY 2019-20.

3. Oil supply risks rising in Nigeria, Libya, Iraq

What's happening? Supply risks are rising in Nigeria, Libya and Iraq. In Nigeria, Forcados exports, due to load 220,000 b/d this month, are on force majeure effective Aug. 13 due to technical issues. Platts Analytics expect this to be resolved within days. In Libya, Waha oil output dropped by 70,000 b/d for three days on Aug. 9 due to a pipeline leak. Production is now nearly back to full capacity of 300,000 b/d. In Iraq, IS targeted the Bai Hassan field which produces 70,000 b/d on Aug. 15, with no impact on supply.

What's next? With persistent technical issues, growing violence in the southeast and resurfacing militant threats, risks to Nigerian crude supply growth through the year are clear. Volatility will also likely grow ahead of October elections in Iraq and December elections in Libya. Rising technical and geopolitical risks to crude supply will warrant more attention through the year as global spare capacity falls from 5.4 million b/d in July to 3.3 million b/d by year-end, according to Platts Analytics.

4. European gas price curve at record highs

What's happening? The European gas price curve trades at record highs through this coming winter, both in absolute terms and relative to the oil complex. With gas now the premium commodity, "oil first" upstream economics are being challenged, as operators look for ways to at least temporarily prioritize gas production.

What's next? Platts Analytics expect a marginal increase in Norwegian gas exports of around 4 mcm/d this winter as gas injections to support oil production are reduced. This will conversely lead to a reduction in Norwegian oil production.

Reporting and analysis by Paul Bartholomew, Asim Anand, Nareeka Ahir, Paul Sheldon, Adrian Dorsch, James Huckstepp, Rene Santos, Ashutosh Singh