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Commodity Tracker: 5 charts to watch this week

US power and gas markets will be watching for recovery in the Texas energy system after extreme weather conditions caused havoc last week, illustrated by our first two charts today. Plus, EU emissions prices continue to break new records, Asian refiners are sanguine in the face of Saudi Arabian oil allocation cuts, and dry bulk shipping rates are likely to get a boost from Brazil's soybean harvest.

  1. 1. After Texas power system buckles, answers and weatherproofing needed...

Texas power generation by fuel February 2021

What's happening? Single-digit Farenheit temperatures across much of Texas on Feb. 15-16 resulted in equipment failure and loss of gas supply at power plants, causing massive, extended power shortages on the system operated by the Electric Reliability Council of Texas (ERCOT). ERCOT does not currently mandate "winterization" of generation and, at any rate, temperatures were below design day conditions. Unplanned generation outages affecting all types of resources reached 46 GW or nearly half of capacity on the morning of Feb. 17. ERCOT estimated that outages at thermal plants, mainly gas-fired, amounted to 28 GW and outages of renewables, mainly wind, reached 18 GW.

What's next? Real-time prices reached the $9,000/MWh price cap from Feb. 15 through the morning of Feb. 19 which will cause financial problems for inadequately hedged traders. Following an expected investigation of the event, the Texas legislature is likely to mandate that power plants remain operable and have adequate fuel supply in weather conditions like those observed last week.

  1. 2. ...while gas output recovery not far off based on 2018 experience

Texas gas production during cold weather 2018 vs 2021

What's happening? Unusually low temperatures in Texas and the Midcontinent triggered a sizable loss in US gas supply. A similar situation happened in the winter of 2017/18, which demonstrated how fast output can fall, but also how quickly it will return once temperatures revert to normal ranges. Gas is also the generation fuel of choice for most of the shut-in power generation in Texas, which led to widespread blackouts and problems with the water supply.

What's next? As temperatures rise, there could be a full production recovery within 1-2 weeks of the incident, past experience suggests. The market is already returning to a world where triple-digit prices in Texas and the Midcontinent are no longer present. The vulnerability to future events will now be addressed and most of the significant longer-term changes will appear in the policy sphere. First among them will be the state's decision to ban exports temporarily, which sharply curtailed LNG exports and pipeline flows to Mexico. The ban is expected to be lifted in the coming days, but may have implications for contracts, most notably LNG export deals.

  1. 3. EU carbon rally hints at next stage in decarbonization

EUA carbon price and 5 year moving average

What's happening? EU carbon emissions allowances are trading at close to all-time highs of Eur40/mt after an unusually cold snap in Europe combined with bullish sentiment over an expected longer-term tightening of supply. A return to milder spring temperatures has seen prices ease back slightly to around Eur38/mt, and the downward price pressure could intensify as nuclear generation returns, taking the pressure off fossil power generation.

What's next? While the short-term fundamentals may look bearish, carbon is a forward-looking market and the long-term supply picture is set to tighten as EU regulators position the EU Emissions Trading System to deliver on the bloc's tougher 2030 emissions reduction goal of 55% below 1990 levels. In practice, tighter supply means the market's key price-setting activity may eventually move away from coal-to-gas fuel switching for electricity generation to the next cheapest area of marginal CO2 abatement. That's likely to require the industrial sectors—such as metals, chemicals, cement and potentially hydrogen producers—to find ways to cut CO2 emissions, and the costs could be a lot higher than the Eur25/mt average carbon price seen in 2020.

  1. 4. Asian refiners shrug off Saudi Arabia crude allocation cuts amid high inventory

India and China jet fuel and gasoline output

What's happening? Refiners in the key Asian economies of India, China, Japan and South Korea have once again received crude term allocation cuts fromSaudi Arabia, mostly ranging between 2%-10% for March-loading barrels, according to refinery trading sources across Northeast and South Asia surveyed by S&P Global Platts.The cut reflects OPEC's strong commitment to curb supply through the first quarter, with Saudi Arabia reducing its production voluntarily by an additional 1 million b/d till March. Abu Dhabi National Oil Co has also informed its Asian term customers nominations across all four of its crude oil grades will be reduced by 10%-20% for March.

What next? However, major Asian refiners are broadly unscathed by the OPEC feedstock supply cuts as the companies plan to limit their oil products output. Crude procurement is no longer the main agenda, as they are more concerned about a build-up in unwanted oil products inventory, with the ongoing movement restriction measures and tepid economic activities keeping any consumer fuel demand recovery in check. China is expected to produce on average 906,000 b/d of jet fuel in the first half of 2021, a slight increase from the 853,000 b/d average produced in 2020, but significantly lower than 1.12 million b/d in 2019, according to S&P Global Platts Analytics data. Gasoline output is expected to average 3.67 million b/d in H1 2021, down 1.3% from 3.72 million b/d in 2019.

  1. 5. Dry bulk timecharter rates likely to trade higher on imminent soybean harvest

Dry bulk panamax vs supramax freight rates

What's happening? February saw Panamax and Supramax timecharter rates soar to their highest levels since before the 2008 recession. China's growing appetite for grain exports from the US Gulf, East Coast South America, and the Black Sea saw a scramble for available tonnage during a historically subdued trading period around the Lunar New Year. The demand surge was met with a shortage of Supramaxes and Panamaxes in the Atlantic, forcing charterers to pay a premium in order to secure ships. As a result, timecharter levels skyrocketed to highs not seen in over a decade.

What's next? China is due to import a record number of soybeans during the 2021-22 marketing year—likely exceeding 110 million mt—as it comes closer to repopulating its pig herds to 100% following the African swine fever epidemic, according to S&P Global Platts Analytics, which estimates this will be achieved by June. China sources most of its soybeans from Brazil, where multiple delays to the harvest have meant mass exports of the crop are likely to start in March. Demand for Supramaxes and Panamaxes will strengthen as soybean cargo volumes from Brazil to China increase. This combined with low tonnage supply in the Atlantic means that timecharter levels are likely to continue their ascent.

Reporting and analysis by Morris Greenberg, Ira Joseph, Luke Jackson, Frank Watson, Philip Vahn, Pankaj Rao, Mark Tan, Oceana Zhou and Hugo Mackay