S&P Global Platts editors focus on oil prices following OPEC+ agreement to collectively hike production in October. Iron ore prices amid China's steel production curbs, the demand boost for European ethanol, and surging gas prices are also on the radar.
1. Aramco slashes Asia-bound prices for October barrels
What's happening? Saudi Aramco cut its October official selling prices for Asia and Mediterranean-bound crude while prices for Northwest Europe and the US were unchanged. Pricing into Asia was cut $1-$1.30/b on the month, with Arab medium and heavy grades cut the least, by $1/b. The price moves come on the heels of the Sept. 1 meeting of OPEC and its allies, which agreed to hike their collective crude production by 400,000 b/d in October, sticking to their plans to keep easing back their historic output cuts.
What's next? S&P Global Platts Analytics said the aggressive cut will likely ameliorate Saudi Arabia's shrinking crude market share in most Asian countries this year versus 2020. China is an exception, as its new mega refineries will keep importing term-supplied heavy sour grades from Saudi Arabia. Aramco's latest pricing could be seen as Saudi Arabia setting commercial terms that will incentivize refiners to lift what has been currently allocated to the kingdom within the OPEC+ framework and most recent production agreement.
2. Weaker steel production, sentiment drive iron ore price volatility
What's happening? The iron ore price bubble has popped. Prices peaked at $233.10/mt on May 12 and stayed above the $200/mt level for the next two months. They are now down by more than 40% after an extremely volatile August, closing at $145.05/mt on Sept. 3. Iron ore prices have been closely aligned with steel prices in the past two years. However, current steel prices are not seeing the wild swings seen in iron ore in recent months. This suggests that iron ore prices are now more closely correlated with crude steel production and perceived steel production than steel prices, Platts Analytics said. Production cut orders were implemented in China in the past six weeks.
What's next? Platts Analytics expects prices to stay in the $150-$160/mt range in September, but market uncertainty will drive appetite for purchasing port stocks in smaller volumes to mitigate risks of price changes while waiting for seaborne iron ore cargoes to arrive. Platts Analytics said this could potentially squeeze margins between the Platts IODEX benchmark and the IOPEX port price assessment.
3. European power prices hit fresh records, driving capture prices
What's happening? The rally in European gas prices has lifted generation costs for gas-fired power plant to all-time highs. Fourth quarter marginal costs of generation for 50%-efficient combined cycle gas plants have soared to Eur124.30/MWh, with fuel costs alone accounting for Eur100/MWh and the remainder for carbon costs. For coal, the equivalent cost is Eur105.59/MWh, with carbon accounting for over 50% of this for 45%-efficient units.
What's next? European electricity prices have chalked up fresh records this summer, in turn lifting hourly capture prices for wind and solar assets. Tightness in gas markets is expected to ease in the mid-term, reducing pressure on power prices, but nuclear and coal plant closures twinned with a strong carbon market may offset that impact. While rising energy costs will lift end-user tariffs, they should also galvanize investment in merchant renewables, reducing the need for subsidies. German capture prices for renewables have tripled in the past year, with July's average above Eur70/MWh—above the country's most recent tender results.
4. UK's E10 gasoline launch seen to boost demand for ethanol in Europe
What's happening? The UK on Sept. 1 formally launched E10 specification gasoline at the pump, which contains up to 10% of ethanol in the blend, up from 5% previously, with the aim of reducing carbon emissions. The UK is one of Europe's largest ethanol consumers, and with the increase in blending rates, European ethanol spot prices reached their highest level in 2021 to reach Eur749.25/cu m on Sept. 3, rallying over 20% since the start of August. The rise in prompt ethanol demand switched the structure between physical spot and second-month Platts futures to backwardation on Aug. 25, which widened to its highest levels since October, at plus Eur60.25/cu m as of Sept. 3.
What's next? Following a continued fluctuation between a pandemic-induced persistent contango structure and its historical norm backwardation, sources believe the EU ethanol market has turned a corner and will continue to trade in its normal backwardated structure. The UK's launch of E10 as the country's standard gasoline blend is expected to significantly increase demand for ethanol in Europe's third largest market. Analysts and market sources estimate the UK's market share as a percentage of European demand to range from 14% to almost 20% in 2022 onwards, from 11% in 2020 and an estimate of 13% in 2021.
Reporting and analysis by Dania Saadi, Phil Vahn, Paul Bartholomew, Karim Elafany, Andreas Franke, Henry Edwardes-Evans.