Commodity Tracker: 4 charts to watch this week

Tensions between Russia and Ukraine are top of mind this week, along with China's efforts to clear the air during the Lunar New Year holiday and ahead of the Winter Olympics. US natural gas production and low-alumina ore prices are also in focus.

1. Total shutdown of Russian gas to Europe highly unlikely: Platts Analytics

What's happening? European gas markets rebounded late January amid concern about potential disruption to Russian gas flows into Europe should the US and its NATO allies impose tight sanctions over Russia's military action against Ukraine. In January, record LNG arrivals to Western Europe balanced reduced Russian flows. Any further escalation in the conflict would likely lead to sanctions or delays in the certification process for the new Nord Stream 2 pipeline from Russia to Germany, with S&P Global Platts Analytics pushing its base case scenario for a start up to October.

What's next? Talks to de-escalate the conflict continue in February on all fronts. The US and the EU are also preparing a sanctions package with focus on a February 7 meeting at the White House to potentially secure additional LNG supply to Europe to offset Russian gas. While Platts Analytics' base case forecast assumes no physical disruption to gas flows because of the situation in Ukraine, flows at risk also include transit flows via Ukraine in case of a military escalation, according to a special report by Platts Analytics. A total shutdown of Russia gas flows into Europe seen as a "highly unlikely scenario." Platts assessed Europe's gas benchmark TTF front-month at Eur91.025/MWh Jan. 27.

Further reading: Russia-Ukraine conflict here

2. US gas production drop lingers posing risk to inventory, prices

What's happening? Following a precipitous drop in US natural gas production earlier this month, output has continued to stumble in late January. Month to date, domestic production has averaged about 92.3 Bcf/d marking a nearly 3 Bcf/d decline from the December 2021 average, Platts Analytics data shows. While new-year declines in US gas production are not uncommon, both the severity and the duration of this year's drop are noteworthy.

What's next? Weaker production this month has significantly tightened the US market balance just as colder weather arrives. In January, residential-commercial gas demand has surged in response, hitting seasonal highs at over 60 Bcf/d recently. Tighter supply and strong demand have increased the call on gas storage recently, with inventory levels falling some 600 Bcf so far this month. With oversized withdraws forecast to continue into early February, both cash and forwards prices at the US Henry Hub could see upward pressure over the coming weeks.

3. China caps crude throughput ahead of Winter Olympics, offsetting oil product exports pressure

What's happening? China's Shandong independent refineries have gradually started to cut crude throughput from around Jan. 22 in response to a directive to cap utilization below 70% during the Winter Olympics Feb. 4-20, as Beijing aims to ensure that emissions remain under control.

What's next? China's oil product sales are usually strong ahead of the Lunar New Year holidays for stockpiling. Sales then slow down until March when industry resumes operations and spring ploughing starts. Capped crude runs in February will keep oil product inventories at healthy levels, offsetting the pressure of exports, which buoys regional markets. China is set to cut oil product exports further in 2022 to control emissions, after an 11.9% year-on-year decline in 2021 and a 17.4% fall in 2020.

4. Healthy steel, iron ore demand drives appetite for low-alumina ore

What's happening: Low-alumina ore prices have surged in the seaborne iron ore market, with wet weather dampening Brazilian supply, typically low in alumina, since late-2021. The alumina differentials under the benchmark 62% Fe iron ore index rose to three-and-half year highs Jan. 26. Traders lapped up almost all the spot low-alumina iron ore cargoes, on the expectation of prolonged supply tightness from Brazil, as the wet season is not yet over. However, Chinese steel mills have not come to terms with the price surge.

What's next: With supportive macroeconomic policies in China, market sources expect healthy demand for steel and iron ore post the Winter Olympics. Iron ore prices, especially the low-alumina ore, could remain supported provided further improvement in Chinese steel margins.

Further reading: Platts metals trade review

Reporting and analysis by Andreas Franke, J Robinson, Oceana Zhou, Yiming Zeng.