In this week's Market Movers, the new year brings concerns about availability of compliant fuel for ships, while market players predict a decline in Russian gas flows via Ukraine. The oil market remains on edge due to increased geopolitical risk in the Middle East.
In this week's Market Movers, the new year brings concerns about availability of compliant fuel for ships, while market players predict a decline in Russian gas flows via Ukraine.
But first: the oil market remains on edge due to increased geopolitical risk in the Middle East.
The US killing of Iran's General Qassim Soleimani last week in Baghdad has increased the likelihood of further attacks on Middle East energy infrastructure. Market watchers and analysts say it has also heightened the possibility of a direct military conflict between the US and Iran.
Iran has vowed to exact "harsh revenge" for the US airstrike that killed its top military commanders. The US State Department warned on Sunday of heightened risks of attacks around oil facilities in Saudi Arabia's Eastern Province. Meanwhile, Iraq's parliament voted to expel US forces from the country in a non-binding vote.
US President Donald Trump in a series of tweets over the weekend threatened further military action against Iran, should Tehran strike back as promised.
Brent crude oil prices leapt by almost 5% in early European trading Friday, hitting a high of nearly $70 dollars per barrel – and in Asia trading on Monday morning they again broke the $70/b mark. S&P Global Platts Analytics expects Brent to be capped at $70/b, unless a major source of supply is significantly damaged.
Over in the shipping markets, participants told S&P Global Platts they expected a retaliation and fear tankers could be among the targets. Most participants said they were erring on the side of caution, although a number of outstanding cargoes from the region are expected to fetch higher prices due to higher war risk premiums being factored in.
Staying on the high seas, the shipping market will be focused on low-sulfur marine fuel availability, and prices, after the introduction of the IMO global sulfur cap.
Since January 1, shippers have been required to burn bunker fuel with a maximum sulfur content of 0.5%. And as demand for these new marine fuels has risen in recent weeks, so have prices.
0.5% marine fuel typically trades at a premium over the dirtier 3.5% fuel oil. The premium of 0.5% FOB Rotterdam marine fuel barges over 3.5% fuel oil barges surged to a little over $314/mt last week. This is the highest level since Platts began assessing 0.5% marine fuel in January 2019.
With supply at major ports said to be relatively tight, the question on the shipping market's lips is for how much longer prices can rise. And that's our social media question for this week: How much higher can low-sulfur marine fuel prices go? Tweet us your thoughts using #PlattsMM.
Increased shipping costs are expected to be widely distributed across the commodities sector. An early example of this comes from the metals industry, where major miners are indicating that higher costs will be passed on to customers in markets such as iron ore and coal. The likes of Anglo American, BHP Billiton and Vale are pursuing various options for coping with the rules, all of which come at a price. Anglo American has said it will burn only compliant 0.5% fuel, Vale has said it will introduce scrubbers that reduce sulfur emissions on board, while BHP Billiton has released the world's first bulk carrier tender for LNG-fueled transportation.
Turning to the gas market, participants will be keeping a close eye on Russian exports to Europe via Ukraine this week. These have fallen since the start of the year, despite Gazprom agreeing a new five-year transit deal with Kyiv.
Gazprom may be choosing to meet customer obligations through storage withdrawals from its 11 Bcm of gas stored in Europe, instead of flowing it via Ukraine. The volumes held in storage are more than double those from previous years as Gazprom looked to mitigate any possible disruption to Ukrainian transit.
Demand across Europe is also low due to mild weather throughout the continent, with prices at the main European hubs down in the range of around €11-12/MWh.
Gazprom agreed to send 65 Bcm of gas via Ukraine this year, though Platts Analytics sees this as a peak volume rather than a minimum, so assumes transit of only 52 Bcm in 2020. This would be a decline from recent years. As you can see from the chart on your screen, annual Russian gas exports to Europe via Ukraine have been around 87 Bcm over recent years.
Switching from gas to power, there are concerns that further strike action could in France could disrupt supplies on Thursday. However, mild and windy weather has almost entirely negated the impact of industrial action to date – and this week is not expected to be much different.
French power currently carries a premium of roughly €10/MWh over that of Germany. But this has more to do the unprecedented level of French nuclear reactors offline due to maintenance delays.
Any changes in the weather pattern would accentuate this, but for now conditions are unusually benign.
Thank you for kicking off your year with us, and have a great week ahead.