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Commodity Tracker: 5 charts to watch this week

  • Featuring
  • Staff
  • Commodity
  • Coal Energy Transition LNG Natural Gas Oil Metals Shipping

This week, S&P Global Commodity Insights editors zoom in on the market's reaction after Saudi Arabia announced over the weekend its plans to cut crude oil output by 1 million b/d in July. Eyes are also on Japan's power demand and Russia's pipeline gas imports into Europe.

1. Asia not expecting Saudi Arabia to cut term supply; buyers could seek fewer barrels anyway

What's happening? Saudi Arabia will slash its crude output by another 1 million b/d for at least July on top of its existing production cuts, under the kingdom's latest bid to reverse a tide of bearish trade sentiment and tighten the oil market. With other OPEC+ members agreeing to maintain their current supply curbs through the end of 2024, the alliance's total quota cuts have deepened to 4.7 million b/d for July -- some 5% of global capacity -- although many members have failed to hit their targets for years, making the actual physical reductions far lower.

What's next? Asia's oil supply is unlikely to tighten following Saudi Arabia's output cuts, as moderate demand growth due to economic turbulence and healthy production outlook outside the OPEC bloc are expected to keep availability concerns at bay for now, trade sources and analysts told S&P Global Commodity Insights. Several Asian refiners, led by China, are widely expected to make voluntary cuts to their Saudi crude oil term nominations following Saudi Aramco's hike of 45 cents/b to the July official selling price differentials across all its grades to Asia, traders in Asia said June 6. What could be worrisome for some buyers, such as South Korea and Japan, is a rise in prices, as they stay clear of Russian oil. For China and India, however, supplies from the biggest non-OPEC supplier would continue to provide a cushion.

2. Japan's Q3 power demand with a heat wave scenario

What's happening? Several Asian countries have experienced strong heat waves since the start of 2023 and well before the typical peak power demand period in the summer. While there were some discussions about how the weather was changing due to the arrival of El Niño later this year, that weather phenomenon has not yet officially started. The heat waves in early 2023 suggested temperature swings could happen even if there were no weather phenomenon officially in place.

What's next? S&P Global Commodity Insights ran a scenario with 3°C higher-than-normal temperatures across the third quarter for Japan. By utilizing a regression, the results showed that average power demand should increase by 2.5 aGW, or about 2.2%, above the base case of 114 aGW. In Q3, in the event of a heat wave, it is likely that both coal- and gas-fired power generation will respond to meet the higher demand. However, gas-fired power generation could see a relatively higher increase than coal-fired power generation as coal-fired power generation is highly utilized. The impact on LNG imports could be around two to three extra LNG cargoes per month. Oil-fired power generation is less likely to increase, as fuel oil is currently more expensive to use for power generation than both coal and LNG.

3. Russia's pipeline gas flows to Europe falls in May

What's happening? Russia's pipeline gas flows to Europe in May fell to 1.76 Bcm from 1.99 cm in April as deliveries via the TurkStream pipeline slowed, an analysis of data from S&P Global Commodity Insights showed June 5. Russian deliveries into Europe by pipeline are currently limited to flows via Ukraine entering at the Sudzha point on the Russia-Ukraine border and via the European string of TurkStream.

What's next? The reliability of the remaining Russian gas exports to Europe remains a concern, with the EU cautioning at the end of March that the total cessation of Russian flows to Europe in 2023 was still a possibility. Any further disruption to Russian pipeline supplies would likely lead to renewed tightening of the European gas market.

4. Increase in Q3 DR pellet premium may weaken margins for DRI steelmakers

What's happening? Higher iron ore pellet premiums for Q3 may contribute to higher costs for direct-reduced iron, weakening the metallic's cost competitiveness with ferrous scrap, billets and slab. The spread between Turkey scrap import benchmark prices with DRI implied costs may fall by more than 30% in July and August from April's high, according to an analysis by S&P Global. Vale has already announced higher contract pellet premiums for Q3.

What's next? The market, following through with Vale's increase in DR pellet premiums, may boost costs for DRI-based steel producers, while allowing scrap and billets to increase competitiveness in displacing DRI-based steel. The overall impact will depend on pellet contracts tracking changes to iron ore prices for 65% Fe CFR China indices and shipping costs. Turkey scrap derivatives prices May 31 were in backwardation through July and August, with higher prices indicated for September. A combination of weaker steel trade demand and prices have been seen in the Turkey and Middle East & North Africa region, with seasonal factors limiting construction-led demand.

5. Australia to see nature-based carbon credit supply gap in the near-term

What's happening? The Human-Induced Generation method for carbon removal made up 32% of Australian Carbon Credit Units in fiscal year 2022-23 (July-June), making it the most prominent nature-based carbon credits in the country. HIR projects involve storing carbon by regenerating permanent native forests on a property where vegetation has been suppressed by activities such as unmanaged livestock grazing, feral animal activity and chemical destruction of regrowth.

What's next? The HIR method will expire Sept. 30, after which no new projects will be registered, Australia's Clean Energy Regulator said June 2. HIR projects generated nearly 4 million ACCUs in fiscal 2022-23, slightly behind the 4.4 million ACCUs generated by landfill gas-based projects and followed by avoided deforestation ACCUs of around 2 million. With the expiration of the HIR method, Australia is expected to face a shortfall in nature-based carbon credits supply over the next two to three years.

Reporting and analysis by Phil Vahn, Sambit Mohanty, Irene Tang, Andre Lambine, Hector Forster, Kshitiz Goliya