After significant new national pledges on carbon emissions last week, commodity markets are digesting the implications. Plus, India’s coronavirus resurgence, crude oil trade flows, and…
Apr 26, 2021
After significant new national pledges on carbon emissions last week, commodity markets are digesting the implications. Plus, India’s coronavirus resurgence, crude oil trade flows, and iron ore pricing and fundamentals.
What’s happening? The Biden administration pledged to reduce GHG emissions by 50-52% vs. 2005 levels by 2030, following the re-entrance of the US into the UNFCCC Paris Agreement in February, after the Trump administration withdrew from the agreement. The current US CO2 emission trend from S&P Global Platts Analytics’ Global Integrated Energy Model (excluding process CO2 and non-CO2 GHGs) shows the US headed for a decline of around 27% by 2030 vs 2005 levels, or around half the new target.
What’s next? Platts Analytics believes that additional policies will be necessary for the US to meet its new NDC. To put into perspective the scale of action required, a full phase-out of coal in the power sector would meet just 25% of a 50% target—assuming reductions in coal-fired generation do not lead to increased gas-fired power generation. However, policies to address process CO2 emissions such as from steel and cement production, or non-CO2 GHGs like methane, nitrous oxide, HFCs or PFCs, would ease some of the pressure to reduce direct fossil fuel combustion to comply with stricter emissions targets.
What’s happening? The price of emitting a ton of carbon dioxide in Europe rallied to another all-time high of over Eur47/mt after the EU Parliament and Council reached informal agreement April 21 on a stronger emissions reduction target for 2030. The new target of 55% below 1990 levels goes well beyond the existing 40% goal, and this means the annual carbon caps under the EU Emissions Trading System will need to be tightened out to 2030, reducing supply of allowances for power, industrial and aviation companies.
What’s next? Political agreement clears the way for the European Commission’s legislative package in June, which will include revisions to the EU ETS and a host of other updates to energy and climate legislation. In the meantime, the market will be watching closely to see if the recent rally has further to go, or whether short-term bearish factors will come into play. Softer seasonal demand for gas, for example, could put downward pressure on the implied coal-to-gas switching price for electricity generation, weighing on carbon prices.
What’s happening? In India, the sharp rise in cases of coronavirus to new record levels has begun to weigh on road mobility and air traffic. Road mobility has plunged back toward April 2020 lows, though combined gasoline and diesel demand in March was very close to the pandemic-recovery high seen in Nov 2020. Air traffic has begun to fall sharply but is nowhere as weak as seen at the April 2020 low.
What’s next? Oil demand growth in India for 2021 was recently scaled back by S&P Global Platts Analytics from 440,000 b/d, toward 400,000 b/d, but this too may be optimistic if the current mobility trends do not reverse in the next few weeks. Fundamentals for economic recovery are supportive, but coronavirus remains a headwind. Indian refiners have already announced they are looking at tempering crude runs in light of weaker demand growth and the recent declines in mobility. India has already voiced publicly that the rise in oil prices, to date, has hurt its economy and balance of payments. While India can’t do anything about world prices, it can throttle back refinery operations in response to reduced domestic demand, if need be.
What’s happening? US refiners have increased their reliance on Russian oil as an alternative to Venezuelan crude, placed off limits due to US sanctions on the Latin American country. The share of Russian oil in US total oil imports hit a record 8% in January 2021, according to data from the US Energy Information Administration.The bulk of these imports are fuel oil products such as high sulfur fuel oil, high sulfur vacuum gasoil, low sulfur vacuum gasoil, high sulfur straight run fuel oil and low sulfur straight run fuel oil.
What’s next? Russia-US relations have turned frosty again after a new round of US sanctions but US refiners are more dependent than ever on Russian oil, and the strong import trend is expected to persist in the coming months. On April 15, the White House issued an executive order imposing sanctions against Russian entities and individuals, which could have knock-on effects on the energy space while not specifically targeting the sector. Calls for the US to expand its package of sanctions measures against the Nord Stream 2 gas pipeline from Russia to Germany are also growing, in a bid to halt the controversial project.
What’s happening? South Korea’s US crude imports in March surpassed the 10 million barrel/month mark for the first time in almost a year. Local refiners turned to North American barrels over Persian Gulf supply due to an extended uptrend in Middle Eastern official selling prices, amid strong production discipline in the area that tightened supply. Concurrently, a sharp rise in the Brent-Dubai price spread made US supply attractive for Asian buyers who typically buy North American cargoes on Dubai pricing basis.
What’s next? South Korea may seek more light sweet US crudes over the coming trading cycles, as some refineries look to raise their gasoline production yield if the Asian product cracks remain strong and regional motor fuel demand continues to pick up, according to feedstock trading managers and market analysts in Seoul. South Korea is expected to import at least three VLCCs, or around 6 million barrels, of US crude on average per month over the second and third quarter, according to the latest industry survey conducted by S&P Global Platts.
What’s happening? Iron ore prices hit a 10-year high on April 20 at $187.75/dry mt CFR China and closed in on record levels of February 2011 after steel demand and prices rose. In Australian currency terms, prices last week hit a record A$240/dry mt CFR China, benefitting producers such as Rio Tinto, BHP and Fortescue from China’s largest supplier country. Iron ore demand has seen support from wider steel-iron ore price spreads and stronger margins in China and global markets. Demand for higher-grade iron ores boosted 65% Fe fines premiums to record highs, as import prices outpaced the effect of operating restrictions. China’s pig iron output in the first quarter rose 7.2% on a year earlier, following declines in February and March 2020 from the COVID-19 pandemic.
What’s next? Potential for firmer policies from China to taper steel and pig iron growth rates during the balance of 2021, and growing demand for ferrous scrap to cut emissions, could weigh on iron ore prices. After steel output in northeast China’s Tangshan was curtailed during Q1, Handan issued plans last week to control steel output and eliminate some outdated production facilities. Scrap has become more competitive, and the market will also be watching scrap and steel trade activity in Turkey, India and the Middle East following the current slowdown. Meanwhile, Brazilian iron ore shipments could recover after a weak Q1 and stronger production from Australia is also likely given seasonal trends, with improved supply expected in coming months.
Energy security concerns are bubbling beneath the surface as the global oil market seems to be entering into the early stages of recovery from the…
Apr 22, 2021
Energy security concerns are bubbling beneath the surface as the global oil market seems to be entering into the early stages of recovery from the pandemic.
While OPEC+ can provide the necessary crude as demand recovers in the near term, there may be a lack of firepower from the rest of the oil-producing fraternity further down the line.
But the recent rise in oil prices could be just what the world needs.
Dated Brent, the global physical oil benchmark, has recently been hovering in the low-to-mid $60s/b, having risen more than 50% since demand-led optimism over the COVID-19 vaccine rollout back in November. And oil prices could shift higher again once the market shakes off the latest bout of coronavirus jitters.
S&P Global Platts Analytics predicts oil prices will climb above $70/b around mid-year as improved supply-and-demand fundamentals starting in May lead to substantial stock draws through to August.
While large oil-consuming countries such as India may crank up the volume over their displeasure and many OPEC+ countries may be eager to ditch compliance to their production-cut deal or push to pump more, both consumers and producers alike may want to consider the benefits should oil prices stay in their arguable sweet spot.
While the warning signs over a supply crunch in the coming years are well documented, they have been overshadowed by the pressing needs of consumer economies ravaged by COVID-19 and producer countries crippled by low oil prices. But these very low oil prices along with the energy transition push have accelerated supply concerns.
Many analysts have tried to put huge numbers on the likely shortfall in spending on upstream oil projects in the coming years, signaling that even with higher prices driving investment in new projects, there is a long way to go before this spending starts to plug the gap.
Saying that, there is a strong correlation between the average oil price and sanctioned non-OPEC oil projects in recent years. Indeed, there is already evidence of a pickup in approved oil investments, with some deferred projects in 2020 getting their due.
US oil production, noted over recent years for its stellar shale growth and ability to bring on crude at short notice, is unlikely to return to its pre-pandemic peak of 13 million b/d until the middle of the decade, according to Platts Analytics.
But there are glimmers of hope.
While many US oil companies are still in a precarious financial position, low well breakevens and positive cash flow this year are stimulating shale output at current prices.
“Sustained oil prices above $60/b could allow oil companies to respect the pledges that they made in their latest investor strategies to maintain capital discipline, return capital to investors, reducing their debt, but at the same time increasing their investment,” Toril Bosoni, the International Energy Agency’s head of oil markets division, said in a recent interview with Platts.
In the meantime, as OPEC+ starts to raise output to meet growing oil demand, the amount of spare production capacity in the system begins to dwindle.
Platts Analytics sees the amount of crude that can be sustainably produced at short notice halving by September to less than 4 million b/d, with most of that left in the hands of Saudi Arabia.
While global spare capacity has over the past decade averaged close to 2 million b/d, according to Platts Analytics calculations, attacks on Saudi Arabia oil facilities become a bigger risk factor when oil buffers are reduced.
OPEC+ may finally take a bigger share of the market given weaker competition and increased demand, but an overreliance on the oil-producing pact with less spare capacity has its own risks.
Middle East geopolitics are notoriously unpredictable, with recent history marked by Iran sanctions, Libya’s internal political dispute, disruptions at pivotal waterways such as the Strait of Hormuz and Bab el-Mandeb, and the attack on Saudi Arabia’s Abqaiq oil infrastructure.
While the container ship that got stuck in the Suez Canal rattled supply chains more than oil markets, it should serve as a reminder of how vulnerable chokepoints are for tankers to deliver crude and key oil products, especially when oil balances are thinner.
Energy security comes at a price for both the consumer and the producer, as the former looks to diversify crude streams and the latter tries to ensure better returns. Guaranteed stable supply matched with regular demand is in the interest of all parties. Getting it wrong could prove costly.
Net zero and carbon neutral commitments are on the rise in 2021, as companies, financial institutions and countries assert their alignment to global climate goals.…
Apr 26, 2021
Net zero and carbon neutral commitments are on the rise in 2021, as companies, financial institutions and countries assert their alignment to global climate goals. The journey presents mission critical considerations for all market participants. In celebration of Earth Day 2021, S&P Global has launched a new intelligence hub of research and insight informing the path to decarbonization — the challenges, the costs and the opportunities to help you make decisions with conviction.
Watch an exclusive interview with Harold Hamm, Executive Chairman, Continental Resources who joined Dave Ernsberger, Global Head of Pricing and Market Insights, S&P Global Platts to discuss benchmarks, the Bakken, and a backlog of wells.WATCH NOW