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Commodity Tracker: 4 charts to watch this week

The potential imbalance between surging demand for oil as economies recover from the coronavirus pandemic and uncertain supplies from Iran and OPEC tops this week's pick of market trends. Plus, Asian refiners look for cheaper crude, US federal lease sales may resume and Pacific US markets rethink natural gas storage options.

  1. 1. Strong demand supports energy prices as Iran sanctions relief and OPEC uncertainty remains

S&P GSCI index energy vs non energy performance

What's happening? Energy prices continue to rise, particularly now against non-energy commodity indices. Oil has led the rise in the energy complex, but US natural gas has posted gains too. Tightening of oil balances had been expected in the middle of this year and this has now been increasingly reflected in the performance of the energy complex. Since early June, Dated Brent has pushed above $70/b and now extending to about $73/b.

What's next? Markets are focusing on the negotiation of a nuclear deal between world powers and Iran, which briefly resumed after the Iranian presidential election concluded and was then paused again, as well as the upcoming July 1 OPEC+ meeting in which supplies for August and potentially beyond will be set. Demand uplift over the summer months, along with delayed supplies of Iranian barrels, means oil market supply will continue to most likely lag demand, even if OPEC continues to cautiously increase output. This will support continuing stock draws. Against this backdrop has been a noted retrenchment in some non-energy commodities, particularly industrial metals. Until oil supplies catch up with demand normalization, perhaps in the shoulder months of autumn, energy commodity prices should remain supported.

  1. 2. Demand recovery in the West makes Asian refiners look elsewhere for cheaper barrels

Northeast Asia crude oil imports from North Sea

What's happening? The Brent/Dubai Exchange of Futures for Swaps, or EFS, spread — a key indicator of Brent's premium to the Middle Eastern benchmark — is hovering near three-year highs as demand recovery in the West outpaces that in the East, with the US, UK and many western European nations leading the global vaccination drive.

What's next? Asian refiners are finding it increasingly expensive to shop for spot cargoes from the west of Suez as the benchmark Brent-Dubai price spread extends the upward momentum, making various crude grades produced in the North Sea, Africa and the Mediterranean that are linked to the European benchmark less economical than Dubai-linked grades. China's independent refiners are poised to trim Norwegian Johan Sverdrup crude in the second half of the year, while they favor Far East Russian ESPO Blend crude and heavy sour Middle Eastern and Brazilian grades, according to feedstock trading sources based in Shandong refinery complex. South Korean refiners could also put the brakes on Forties crude purchases in H2 as they no longer find Brent-linked North Sea crude attractive, feedstock trading sources based in Seoul told Platts.

  1. 3. Strong oil prices could help US Gulf lease sale as court orders Biden ban lifted

Gulf of Mexico oil potential and US leasing ban

What's happening? A US district court judge in Louisiana on June 15 ordered the Department of the Interior to end its moratorium on oil and gas leasing sales on federal lands and in offshore waters, taking issue with the regulatory process used and concluding that the policy has likely hurt the economies of producing states. The judge granted a preliminary injunction in the case and ordered Interior to put back on the calendar Lease Sale 257 in western and central Gulf of Mexico and Lease Sale 258 in Alaska's Cook Inlet.

What's next? The Biden administration is expected to appeal and may turn to other regulatory means to limit lease sales, both onshore and in the Gulf of Mexico. But the US Interior Department has said it would comply with the judge's order, meaning the areawide offshore lease sale, which had originally been scheduled for March, may still take place. Parker Fawcett, North American supply analyst for Platts Analytics, said those longer-term impacts were "increasingly becoming concerning with each passing month of the moratorium in place," as Gulf of Mexico producers rely heavily on acquiring new leases to continually advance projects further out. "We would expect a strong Lease Sale 257 once conducted on the back of this ruling, supported by strong prices, an uptick in exploration and long-cycle projects, as well as continued long-term uncertainty hanging over the future of the federal leasing program," Fawcett said. "Onshore lease sales should also see relatively strong results once conducted, especially with the Biden administration showing its reluctance to target existing lease or permits to drill."

  1. 4. US Pacific storage region loses 51 Bcf of working gas but market effect looks minimal

US PGE storage region stock levels

What's happening? PG&E has reclassified 51 Bcf of natural gas in its storage system from working gas to base gas as the company pivots away from commercial storage due to state regulations. Despite the dramatic change in gas stocks, the net effect on the gas market should be minimal. PG&E inventories have not dipped below 100 Bcf in years, reaffirming volumes now classified as base gas were unlikely to be utilized.

What's next? As demand growth over the next five years shifts to less obvious seasonal sources of demand, such as LNG exports or industrial, the need for high-deliverability, multi-cycle storage will become more apparent. Given the geological limitations of building new salt dome fields, which allow quick switches between injections and withdrawals, the market may have to find new ways to rethink storage.

Reporting and analysis by Alan Struth, Philip Vahn, Meghan Gordon and Brandon Evans