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Market Movers Europe, Jul 20-24: OPEC+ reviews production cuts as jet fuel inventories begin to draw

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Watch: Market Movers Europe, Jul 20-24: OPEC+ reviews production cuts as jet fuel inventories begin to draw

  • Featuring
  • Gary Clark
  • Commodity
  • Agriculture Energy Electric Power Oil
  • Length
  • 05:00
  • Topic
  • Coronavirus and Commodities Environment and Sustainability OPEC+ Oil Output Cuts

In this week's highlights: OPEC+ reviews production cuts, Equinor kicks off Q2 earnings season. Will high jet fuel inventories in Europe begin to draw? European palm oil prices look to Malaysian production data, while carbon allowances look for support.

  • OPEC+ reviews production cuts
  • Equinor kicks off Q2 earnings season
  • Narrowing contango could release jet fuel stocks
  • European palm oil market looks to Malaysian data
  • EU carbon prices ease back from 14-year high

Platts Live

View Full Transcript

In this week's highlights: Will high jet fuel inventories in Europe begin to draw? European palm oil prices look to Malaysian production data, while carbon allowances look for support.

But first, in oil, the market is keeping a close eye on demand and whether a second coronavirus wave could derail last week's decision by the OPEC+ group of producer countries to relax their drastic cuts to global output.

From next month, the group has said it will ease the production cut agreed in April, which took about a tenth of supply off the global market, to a more modest cut of around 8 million b/d, or about 8% of pre-coronavirus demand.

Saudi Arabia has voiced confidence the pandemic can now be contained. One point of tension is over-producers - countries such as Angola, Iraq, Kazakhstan and Nigeria - which are expected to submit plans by the end of the month to compensate for having exceeded their quotas.

And on the corporate front, it's the start of the second-quarter earnings season, with the balance sheets of the oil and gas majors under strain due to the collapse in oil prices. However, the early signs are some will try to strike a positive note, having already announced massive financial impairments and cuts to their spending and dividends.

Equinor, which publishes its results on Friday, could be among these. Its giant Johan Sverdrup field, which came on stream last October, is boosting Norwegian oil output at a time when others are cutting back, while government tax cuts are helping revive investment levels.

Downstream, the oil product hit hardest by the pandemic has been jet fuel. The collapse in demand has meant jet being put into storage. The amount in floating storage in Northwest Europe totals around 1.6 million mt, or around one month's worth of pre-coronavirus imports, Platts and Kpler data show.

However, when stocks will be released is uncertain.

Some traders are saying before the end of 2020, due to quality concerns associated with storing jet fuel for too long, but also because traders are reluctant to hold onto stock into the New Year.

Others argue the timing of the release of stocks is just a question of demand.

The chart shows that as demand has crept up from rock-bottom levels, the contango in European jet fuel cargoes has narrowed, but traders will be looking to see how much further the market structure changes in the coming week.

A contango market structure is one in which prices for delivery of a product at some point in the future is greater than the price for delivery of that product now.

In theory, with the jet fuel market in contango, a trader may buy jet fuel now, store it and sell it for higher price for delivery in the future, locking in a profit.

As you can see, the front-month/second-month contango in jet fuel CIF Northwest European cargoes was at $5.50/mt on July 16, its narrowest since March 3 and down from a record $34.00/mt on April 14.

Given the lack of jet fuel demand, floating storage is driving fluctuations in market structure. If the contango narrows then jet might be released from floating storage, which could put pressure on the nearby prices, and in turn widen the contango.

Moving on to oil of a very different kind, European palm oil prices are expected to consolidate or increase based on production data released on Friday.

Malaysia is a major supplier of palm oil to Europe, and Malaysian palm oil data for July 1-20 will be released by the Malaysian Palm Oil Association.

Market participants are expecting production to contract based on a slower output recovery in Asia, symptomatic of heavy rain and floods hitting palm oil production in Malaysia and Indonesia.

Rotterdam prices are expected to continue to increase on the production data as well as rallying soybean oil prices. European traders do not expect palm oil supply to recover until August and September.

And finally, the carbon market will be looking to see if there is a recovery or a further fall this week.

As the chart shows, European carbon allowance prices have just come off a 14-year high of over 30 euros a metric ton. An allowance allows for the emission of 1 ton of CO2.

Many analysts have said the price surge, in which prices doubled in the space of four months, had been overdone, particularly in view of very bearish fundamentals.

Market players will be watching closely this week to see where the next support level may be.

Primary supply of allowances from government auctions will be slashed by 50% in August, but is set to rise again in September through November. Traders will also be watching in September for the European Commission's expected proposal to tighten the EU's 2030 emissions target.

For more on all the issues affecting commodity markets, please check out Platts Live, a new section of our website that has been created for our customers to continue engaging with us, and each other. You can find it at the address displayed on your screen.

Thanks for kicking off your Monday with us and have a great week ahead!