Commodity Tracker: 5 charts to watch this week

Markets will look out for any indications of OPEC+ yielding to the G7's call for higher crude production amid rising oil prices. In the US, majors are opting to maintain capital discipline while smaller players are accelerating drilling activities. Also in focus are the role of used cooking oil in the aviation industry's decarbonization goals, the indexation drive in steel pricing, and the impact of India's recent export hikes on the steel and shipping sectors.

1. G7 urges OPEC to boost oil output, commits to halt fossil fuel funding

What's happening? The G7 has asked OPEC to hike crude oil production as energy prices surge. The call was issued via a communique following a meeting of G7 energy and environment ministers in Germany May 27. The group also said the fallout from the Russia-Ukraine war should not compromise climate policy, and has committed to stopping fossil fuel funding.

What's next? The next OPEC and non-OPEC ministerial meeting has been set for June 2, and the coalition is unlikely to deviate from its current production plan. Many of its members are struggling to produce near their quotas due to capacity constraints, exacerbated by a lack of investment in the upstream sector. Western sanctions on Russia have also had a huge impact, with production falling by more than 1 million b/d since Vladimir Putin invaded Ukraine on Feb. 24.

2. Small/Private operators lead recovery; majors maintain capital discipline

What's happening? US drilling activity has recovered to almost pre-pandemic levels of March 2020. However, the recovery has been uneven. Publicly held companies are still behind, with small/privately held companies leading the pack. This is due to capital discipline from publicly held operators who are focusing on paying down debt and increasing returns to shareholders instead of the uncontrolled activity growth of past years that led to poor results when oil prices dropped and a substantial drop in share prices.

What's next? Despite record oil prices, publicly held operators will likely continue to stick to capital discipline and moderately increase drilling activity while small/private operator will continue on their accelerate activity path. The latter, with few or no shareholders, have a different strategy that consists of mainly increasing activity while prices are high and then trying to sell the assets.

3. Aviation sector's decarbonization goal poised to benefit used cooking oil market

What's happening? European countries were among the first to mandate the reallocation of a small share of jet fuel/kerosene requirements to sustainable aviation fuels back in January 2020. With global efforts to decarbonize the aviation industry expanding, refiners have been exploring various SAF feedstock options, and even waste products such as used cooking oil, particularly since the use of virgin oils is not allowed in most markets.

What's next? The aviation industry is aiming to reduce its CO2 emissions in 2050 by 50% from 2005 level. Used cooking oil, as the main waste oil, is expected to benefit as the industry moves closer to its goal.

4. Indexation in steel pricing gathers pace on supply chain disruptions, weaker iron ore link

What's happening? A wider and more volatile spread between steel and iron ore prices and pandemic-fueled supply chain disruptions have led to a quiet revolution in steel pricing, with sectors as diverse as automotive to white goods and new energy using steel price indices as the basis of settlement for physical steel transactions.

What's next? As security of supply becomes an ever more pressing issue for end-users and timing markets have burnt fingers amid a complex geopolitical landscape, adoption of index-linking is gradually being examined as a way to manage risks, although not without challenges to be overcome.

Special report: Changing gears: Steel's shift to price indexation

5. Higher duties on iron ore, steel exports to India could put pressure on dry bulk freight rates

What's happening? India hiked export duties on iron ore pellets from zero to 45% and steel from zero to 15% effective May 22. The export duties are applicable even for countries with whom India has free trade agreements. Indian steel export volumes stood at around 3.9 million mt during January-April, up 14% on the year, according to S&P Global Commodity Insights data.

What's next? The new tax measures are expected to pressure the Supramax as well as Handysize dry bulk freight rates out of the east and west coast of the country, sources said. The new duties may also see shipowners being reluctant to fix cargoes destined for India or raise their offers for inbound freight significantly as they face potential risks of outbound cargoes drying up.