Asia's anticipation of Iranian crude inflows returning tops this week's pick of market trends. Plus, Carbon prices and global climate politics, Henry Hub gas prices, Indian power demand, and Chinese toluene and xylene market indicators.
1. Asia hopes it can revive love affair with Iranian crude sooner than later
What's happening? Asian refiners are planning in advance to renew their love affair with Iranian crudes and fill a partial vacuum of medium and sour grades the global oil market has witnessed over the past two years, as hopes rise that Washington would likely lift sanctions on Tehran.
What next? Although there is still no clear indication on the possible final outcome of the Washington-Tehran talks, there is growing optimism the floodgates for Iranian oil will open up later this year. That is expected to potentially widen the Brent/Dubai spread, redraw demand-supply balances for light versus heavy crudes, and set the stage for a battle with rival Middle East producers. Medium and heavy sour crudes have been in short supply in recent years due to sanctions on Iran and Venezuela, as well as production cuts implemented by OPEC. Traders said any easing of sanctions would weigh on spot differentials for other Middle East crude grades. An economy battered by sanctions, Iran will be keen to increase exports and win back customers by adopting a prudent pricing strategy, traders said.
2. Amid rising carbon prices, climate is high on G7 agenda
What's happening? The G7 group of highly industrialized countries is set to gather in Cornwall, UK, on June 11-13 to discuss a range of topics including climate change and a recovery from the global pandemic. While not on the formal agenda, informal conversations are likely to be held on the EU's upcoming proposal to impose a border charge on the carbon content of goods imported into the EU.
What's next? The European Commission is expected to unveil a legislative proposal on a Carbon Border Adjustment Mechanism in July. The CBAM aims to protect Europe's industrial companies from carbon-related competitive distortions as well as encouraging other countries to adopt equivalent climate protection measures. As a result of the CBAM, the future of free carbon allowances under the EU Emissions Trading System is at stake—an asset that is rising in value and reached an all-time high of Eur56/mt CO2 equivalent in May.
3. Henry Hub gas tops $3/MMBtu amid tight US market fundamentals
What's happening? Henry Hub gas edged up to over $3/MMBtu in the week beginning May 31, marking its highest price level since February 2021 when historic Polar Vortex weather pushed the benchmark index to a record high. The early-summer rally in gas prices comes as the US market balance continues to tighten amid rising seasonal demand. In the domestic market, warming temperatures lifted electric cooling demand to seasonal highs in the same week, while export demand for US supply also remains strong. At US LNG export terminals, feedgas demand is trending just below record levels, averaging 10.7 Bcf/d this month. Pipeline flows to Mexico are also hovering near record levels at over 6.6 Bcf/d in June.
What's next? Over the balance of summer, US benchmark gas prices are likely to stay elevated as domestic supply remains tight. In the forward market, calendar-month valuations for the summer season are currently priced at a slight premium to the cash market. In June, total US gas production has averaged just 90.5 Bcf/d—well below pre-pandemic levels that briefly topped 96 Bcf/d. With many exploration and production companies continuing to hold the line on drilling, S&P Global Platts Analytics expects US output to grow little this summer, likely remaining below 92 Bcf/d through the third quarter.
4. India's low power demand, high output from renewables reduces thermal gap
What's happening? Indian power demand fell sharply in the second half of May, with coal-fired power generation posting its largest monthly decline on record. The biggest factor impacting power demand is the partial lockdown implemented due to the coronavirus pandemic. Although recently registered COVID-19 cases have started to come down, they remain at elevated levels.
What's next? Although coal-fired power generation has fallen considerably in May, it remains above 2020 levels. There has also been rise in generation from non-hydro renewables in May, as new capacity comes online. S&P Global Platts Analytics expects non-hydro generation to continue to rise though to August, which will narrow the thermal gap and limit any increase in coal generation.
5. Shrinking East China isomer mixed xylene, toluene stockpile could deflate further
What's happening? Prices of toluene and isomer mixed xylenes in Asia have regained ground lost last year, but East China inventories continue to slide, despite China's recent decision to slap a consumption tax on imports of mixed aromatics starting June 12. That was expected to boost demand for toluene and mixed xylenes in China but the effects were tardy. While refining margins have improved, the gasoline-blending sector in Asia is still far from its pre-coronavirus performance, given current limitations to movement and that more integrated refining complexes are able to meet demand locally. Moreover, healthy paraxylene and benzene margins from the toluene disproportionation sector this year has kept prices along BTX complex high, further deterring local China traders from buying.
What's next? Traders are watching to see whether gasoline blenders in East China can reinvent their business models while continuing to support blendstock imports. There will be a rejigging of blendstocks from taxable mixed aromatics, but toluene and mixed xylenes might not stand as priority candidates in the queue of blendstocks available in the market. More importantly, when the price rally for benzene and paraxylene starts to tone down and normalize, demand for isomer mixed xylenes and toluene would likely retreat in a similar fashion.