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Fuel for Thought: Oil demand to hog limelight despite OPEC+, US policy shifts

Commodity Tracker: 4 charts to watch this week

OPEC+ quota compliance and plans for 2020 top this week's selection of key themes in energy and raw materials markets. Also on the agenda are Japan's winter heating demand, palm oil pricing and France's recovering nuclear output.

1. OPEC+ nears a critical decision on 2021 oil quotas

OPEC+ output compliance with quotas in October 2020

What's happening? The OPEC+ coalition's quota arrangements are in the spotlight again following higher output in October, as reported in S&P Global Platts' latest survey. Production ticked up by 210,000 b/d to 24.54 million b/d, after Libya ramped up following an October peace deal, and crude prices have softened in recent weeks.

What's next? A key OPEC+ monitoring committee, co-chaired by the alliance's two largest members, Saudi Arabia and Russia, will meet Nov. 17 as the first step towards a decision on 2021 production volumes. The group's formal meeting then takes place Nov. 30-Dec. 1. Amid the difficult market conditions, OPEC+ officials have strongly hinted that their original plan to ease quotas for 2021 by some 2 million b/d is likely to be shelved for at least a few months.

2. Palm oil glut weighs on European prices amid weak demand

Palm oil prices Rotterdam vs origins

What's happening? Demand destruction for palm oil in Europe is causing tanks to fill in Rotterdam, suppressing European palm oil prices below replacement costs – the cost of the commodity from another origin plus freight to Europe. The current rate for a 40,000 mt tanker shipping palm oil from the Singapore Strait to Rotterdam on a 1:1 basis is $40/mt.

What's next? Improving demand from European food and biodiesel sectors or falling prices at origin would help traders' margins improve. However, adverse weather conditions are delaying harvests in Indonesia and Malaysia leading to supply tightness in the FOB market. China and India are well covered for palm oil for the remainder of 2020, which could be a bearish signal moving forward.

3. Northeast Asia's winter chills provide bright spot for S. Korean refiners, Russian crude

Russian crude oil advantage in Asia winter 2020

What's happening? Northeast Asia is facing colder-than-average weather this winter, and refiners in Japan and South Korea are preparing to meet the associated fuel demand. In Japan, temperatures in 10 out of 12 regions are forecast to be below the 30-year average over November-January. Domestic kerosene shipments surged 45% in the week to Nov. 7 versus the previous week, based on Petroleum Association of Japan data.

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What's next? Japan's heating needs could allow South Korean refiners to increase kerosene exports to the country, providing some consolation in a year of thin margins and weak demand. Far East Russian crude suppliers also stand to benefit, as refiners are already actively seeking short-haul light sweet crude supply to quickly ramp up kerosene output. Far East Russian crude grades including Sakhalin Blend and Sokol give a high yield of light and middle distillates such as naphtha and jet fuel/kerosene. Voyage time from Far East Russian ports to Northeast Asia is typically less than a week, versus 10-15 days from Southeast Asia and Oceania, up to 30 days from Persian Gulf ports and more than 45 days from the US Gulf Coast.

4. Downside winter price risk increases on recovering French nuclear

French nuclear power generation and forecast

What's happening? French nuclear has bounced back, a bearish indicator for power prices following record low availability over the past year. As of Nov. 11 operator EDF had 42 reactors online, exceeding 2018 and 2019 levels for this time of year. The recovery, which has been gathering momentum since October, is reflected in a French December baseload contract down 20% over the period, widening the arbitrage to the UK market a few weeks ahead of commissioning of a second 1 GW subsea interconnector between the two markets.

What's next? Even with nuclear output in the upper 40 GWs, a prolonged, high-pressure, low-wind cold snap this winter could still cause system tightness if French demand peaks above 90 GW. Transmission system operator RTE is set to update its winter outlook shortly, with the situation looking a lot more comfortable than was the case a few weeks ago. The wider picture is of strong hydro stocks across France, Switzerland, Spain and the Nordics going into winter, the "Nordic battery" close to a record high with 116 TWh stored in reservoirs as yet another low-pressure weather system is due to sweep across northwest Europe.