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Commodity Tracker: 4 charts to watch this week

In this week's Commodity Tracker, S&P Global Platts editors and analysts look at the UK's new timetable for banning sales of new ICE vehicles, oil market structure and EU carbon emissions, as well as price drivers for iron ore pellets as contract negotiations get underway.

  1. 1. UK's 2030 ban on new ICE cars could speed EV sales, dent fuel demand

What's happening? The UK has brought forward its ban on new gasoline and diesel passenger cars by five years, from 2035 to 2030, making it the seventh European country to aspire to a ban on sales of light duty combustion engine vehicles within the next decade. This could accelerate the penetration of alternative fuel vehicles in the UK car fleet, and AFVs have already had a banner year, capturing a 9% market share in 2020.

What's next? S&P Global Platts Analytics Future Energy Outlook estimates indicate the ban on sales of gasoline and diesel cars could prompt displacement of 65,000 b/d of annual refined oil product demand in the UK by 2030, depending on enforcement and the speed of the phase-out. The ban notably makes exceptions for hybrids, and amid the broader economic downturn there is evidence that consumers may continue to prefer used cars to new purchases. S&P Global Platts Analytics currently forecasts AFVs could capture up to a 50% market share in the UK by 2030, and the new target date in the UK represents potential upside to this outlook. Other European countries aspiring to ban ICE sales over the next ten years are Norway (2025), Denmark, Iceland, Ireland, the Netherlands, Slovenia, and Sweden.

2. Oil market at inflection point as Dubai edges into backwardation

What's happening? Oil market structure, which reflects prompt month pricing relative to deferred month pricing, has tightened as November has unfolded. As such, the degree of contango (prompt month at a discount to deferred pricing) has lessened, with Dubai having moved into increased backwardation (prompt month at a premium to deferred).

What's next? The change in structure reflects the market's perception of supply and demand. The shift from contango to backwardation carries particular importance and reflects an underlying tightening in market fundamentals. Additionally, Saudi Aramco uses the shift in Dubai market structure as one key component in setting its sales prices to Asia each month. Dubai structure has risen about $1/b since end-October, which suggests Aramco will raise pricing to Asia for January. This should induce refiner restraint on nominations, which would also reinforce Saudi production restraint.

3. EU carbon hits 2-month high after 2021 auctions delayed

What's happening? EU carbon emissions allowance prices have seen a bullish November, powering up to a two-month high of over Eur28.50/mt Nov. 27. The rising prices reflect an unexpected delay to the start of carbon auctions in 2021, for technical reasons announced by the European Commission Nov. 17. This means the market will be without fresh supply for a period of about 6-8 weeks from Dec. 14.

What's next? The market will be watching closely to see if this extended halt to auction supply will drive additional buying on the exchanges, potentially pushing the carbon price to fresh highs. Carbon prices have also reacted to the bullish mood in the wider markets, as a number of countries have developed vaccines to protect against the coronavirus. This has raised the prospect of an end to government-imposed lockdowns, potentially allowing a recovery in demand for commodities.

4. Weak 2020 iron ore pellet premiums set up tense Q1 talks on steel rebound

What's happening? Iron ore pellet contract premium pricing since Q1 2020 has been historically weak relative to total pellet prices. This was due to weaker demand for pellets, which boost productivity at blast furnaces, at a time of lower steel prices and margins. Premiums in November were close to marginal pelletizing costs, incentivizing sales of iron ore concentrate instead. Overall pellet prices have been better supported in 2020, due to high iron ore fines prices on stronger demand in China and reduced iron ore production in Brazil and Chile in 2019.

What's next? Iron ore premium negotiations are ongoing for 2021, as global steel output rebounds and price surge. Contract premiums shifted to a quarterly basis after annual premiums broke down in mid-2019, and market talks center on premiums for Q1 2021. Support could come from China, which continues to operate blast furnaces at record levels and has recently found lower availability in imported pellets. Lower pellet supplies this year from Brazil, Sweden and Canada, along with recovering demand in Atlantic and India markets have tightened spot supply.

Reporting and analysis by Mark Mozur, Zane McDonald, Alan Struth, Sergio Baron, Frank Watson, Hector Forster