Commodity Tracker: 6 charts to watch this week

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.

1. Structure of new policies crucial for meeting US emissions target

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.

2. EU carbon prices hit fresh high after new emissions target agreed

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.

3. Coronavirus surge in India hinders oil demand recovery

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.

4. US refiners buy more Russian crude despite diplomatic tensions…

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.

5. …while South Korea looks to US oil as Middle East OSPs rise

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.

6. Iron ore 62% Fe prices hit 10-year high, 65% Fe premiums widen

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.

Reporting and analysis by Jeff Berman, Mark Mozur, Matthew Williams, Frank Watson, Alan Struth, Phliip Vahn, Fred Wang, Charles Lee, Eklavya Gupte, Robert Perkins, Hector Forster