Commodity Tracker: 6 charts to watch this week

The UK's new Labour party government is planning to impose stricter taxes on North Sea oil and gas revenues. In other news, the European distillates market is under pressure due to the record-high US diesel and gasoil exports, whereas Japanese refiners are considering reducing their term crude purchases due to the weakening of the yen. Brazil's ethanol prices, the Middle East sulfur market and the improvement in the Indian bunker market are also in focus.

1. New UK government expected to shake up North Sea energy, vehicle policies

A new Labour Party government in the UK has promised to enact tougher taxes on North Sea oil and gas revenues and an end to new offshore licensing, which is prompting nervousness among producers. They are calling for greater stability and more favorable tax conditions for the sector to go ahead with new investments in oil and gas, as well as low-carbon projects such as carbon capture and storage. It comes at a time of falling oil output, rising energy security fears and concern that an aging power grid is hindering wind and solar development, particularly offshore in the North Sea. On the consumer side, Labour is expected to reinstate a 2030 cut-off for sales of new Internal Combustion Engine cars, pushed back by the previous government, while the car industry wants greater certainty over a Zero Emissions Mandate dictating the cut-off for Internal Combustion Engine car manufacturing.

What's next? Labour will outline its legislative plans at a state opening of parliament scheduled for July 17 and a national budget speech by Chancellor Rachel Reeves confirming her initial tax measures is expected probably by the autumn.

2. US diesel, gasoil exports to Europe hit record weekly high

What's happening? An influx of diesel/gasoil from the US has put pressure on the European distillates complex, as exporters shipped record volumes to the continent in the final week of June. Spurred by domestic price weakness and falling freight rates, exporters leaped on a brief arbitrage window to Europe, shipping some 39 diesel/gasoil cargoes between mid-June and July 3. Yet with demand at normal levels, incoming supply has weighed on sentiment. Front-month/second month ICE low sulfur gasoil futures flipped to contango July 3, a sign of prompt market weakness.

What's next? With US arrivals set to land in the coming week, traders remain watchful for signs of stock builds at the Amsterdam-Rotterdam-Antwerp hub. Insights Global data showed an inventory draw in the week to June 27, though levels remain 10% higher than 2023 levels. Inventory strength will provide a key indicator for refining margins heading into autumn, with September maintenance and peak diesel season approaching. Further injections from the Middle East could exacerbate weakness in the second half of July, while hurricane risks provide a key upside for the US Gulf Coast and global complex.

3. Japanese refiners consider cutting term crude purchases for spot as yen tumbles

What's happening? The yen is one of the most underperforming currencies in the world, causing financial strain on refiners who typically buy large quantities of crude oil in the international market. Domestic refining and oil product sales margins are under pressure due to the faltering purchasing power of the dollar and inflation is impacting domestic fuel demand.

What's next? Japanese refiners are considering reducing their term crude purchasing commitments and adopting a more flexible spot buying strategy due to the yen's sharp weakness, which is diminishing their purchasing power. Refiners may not be able to completely overturn existing term contracts but could nominate the minimum monthly term lifting volume and consider signing lower term supply deals. To enhance feedstock economics and refining margins, refiners could adopt a more spot-based crude procurement strategy. In addition, more kerosene and gasoline cargoes could be set aside for exports to recoup some of the dollar spending on feedstock procurement and generate dollar revenue.

4. Incoming Brazil imports to weigh on nearby European ethanol prices

What's happening? Market participants have reported that notable volumes of ethanol from South America, mainly Brazil, are starting to arrive in Northwest Europe, as T2 ethanol prices have gradually increased through first half. The arrival of vessels from Brazil will further resupply the Amsterdam-Rotterdam-Antwerp hub along with inflows from the US since March, with Europe amid its high demand summer season. The boon to supply has weighed on the spot market, with T2 ethanol prices slipping 2.3% on the week to Eur738/cu m July 8, S&P Global Commodity Insights data showed.

What's next? Market participants in Brazil do not expect the recent transatlantic flows to be an indicator of a long-term trend. Strong domestic demand for hydrous ethanol in Brazil is expected to retain inventories on the continent through 2024. With imports covering almost a quarter of Europe's annual consumption, market players will be looking for other sources of T1 material to meet the increased demand expected this year.

5. Indian ports anticipate increased demand, compete with Colombo

What's happening? The Indian bunker market has seen improved product availability following previous supply shortages. Refineries are now well-stocked, as indicated by assessed prices for both Indian and Sri Lankan ports, according to Bunkerworld data. There is a notable increase in inquiries across ports in both western and eastern India.

What's next? The bunkering volume in India is expected to increase, addressing previous supply shortages. There should also be improvements noted in eastern ports. However, a key consideration will be potential disruptions in bunker deliveries due to adverse weather conditions during the monsoon.

6. Middle East sulfur market finds upward pressure after briefly lackluster stretch

What's happening? Middle Eastern sulfur producers have raised their monthly sulfur selling prices by $2/mt across the board for July. The move from the Abu Dhabi National Oil Co. Muntajat and the Kuwait Petroleum Corp. comes after June's brief slide, in which the three prices fell by $7/mt month-on-month.

What's next? A bullish sentiment is expected to spread across global sulfur markets in the early weeks of the third quarter, with traders pointing to resurging requirements in China and Indonesia -- two of the hotbeds for global sulfur demand.

Reporting and analysis by Nick Coleman, Kelly Norways, Philip Vahn, Harry Clyne, Abhishek Anupam, Matt Hoisch