Commodity Tracker: 7 charts to watch this week

1. Bullish markets characterized many commodities in the first week of 2021, not least LNG, which opens this week's bumper selection of trends. There is also upside for EU carbon prices, container rates and European steel mill margins, while US economic data suggests there is room for more oil-based hedging against inflation.

3. 1. Japan winter freeze adds support to LNG spot prices

What's happening? Colder weather has been supporting power demand and heating needs in Japan, with recent daily power demand about 15% above year ago levels, while lower nuclear generation is creating shortages in the western grid. Japanese LNG buyers are not selling back their relatively inexpensive sub-$10/MMBtu contract volumes into the JKM spot market despite ample financial opportunity to do so, with spark spreads in the country, more profitable than the potential resale into the LNG market. A palpable fear of a short LNG supply situation is also playing into fears of reselling and being left short. Japan has not bought any spot LNG for some time, relying on its contract volumes to balance.

What's next? While weather will continue to remain an important driver, the power situation in western Japan should improve next month. Three nuclear plants are expected back by mid-February, which should alleviate supply concerns, but forward power prices for February remain particularly elevated, providing an incentive to use LNG in the Japan power market. S&P Global Platts Analytics believes coal-fired generation is already highly utilized, while recent coal import data does not show much increase in spot shipments; but Japan still has a large amount of idle oil capacity that can be turned on.

2. 2. Haynesville adds rigs but wider US shale gas slump persists

What's happening? In January, natural gas production from the Haynesville shale is averaging over 13 Bcf/d, or its highest in eight months. As output from most US shale basins continues to stagnate, operators in the Haynesville have been gearing for growth, adding 10 rigs in the fourth quarter, and making it the only US shale play to have fully restored its drilling fleet to pre-pandemic levels.

What's next? The surge in Haynesville production comes as total US gas supply remains in a slump that's forecast to continue until early 2022, according to S&P Global Platts Analytics. In January, total US gas production has averaged just 90.7 Bcf/d—down more than 5 Bcf/d from its prior record high—as output from associated plays like the Permian, the Eagle Ford and the Bakken has continued to stagnate. While mild weather and elevated storage volumes this winter have dampened the outlook for prices since late October, a modest recovery in the forward market has taken hold recently, pushing the 2021 Henry Hub curve to $2.80/MMBtu—up about 13% from its recent low.

3. Gazprom's Ukraine gas transit in spotlight as Nord Stream 2 work set to resume

What's happening? The transit of Russian gas via Ukraine dropped to just 55.8 Bcm last year, with Gazprom failing to use all the 65 Bcm of capacity it booked under its five-year transit deal with Kyiv from December 2019. In 2021-2024 it has only booked 40 Bcm/year of capacity, and without Nord Stream 2, it will likely need to buy more short-term Ukrainian transit capacity to meet European demand.

What's next? Work is due to resume on Jan. 15 to lay Nord Stream 2 in Danish waters, and once completed should give Gazprom an additional 55 Bcm/year of transportation capacity to Europe. However, there are still efforts to block the completion of Nord Stream 2, notably through US sanctions, so the timeline for its startup remains unclear.

4. Investors look to oil as hedge against rising inflation

What's happening? Rising implied inflation, as reflected by the difference in rates on nominal treasuries and inflation adjusted treasuries, is increasingly supportive of commodity investment as a hedge by money managers. For oil, there is a noted broad correlation between non-commercial net length and the price of the underlying asset. Oil is just one commodity in a broader class, but it is among the deepest in terms of financial liquidity, in addition to physical consumption and transaction, which makes it particularly attractive.

What's next? As money managers look to commodities as a hedge against rising inflation, the degree of investment is also worth noting. The market valuation of the Wilshire 5000 is almost $39 trillion, while the notional investment in oil commodities is only $34.6 billion, which makes the degree of investment just short of 0.1%. Bond investors worried about rising inflation and eroding purchasing power of their bond portfolio could increasingly look to commodity investment as a potential hedge. The potential for that investment, if conditions warrant, are orders of magnitude higher than seen currently. Even so, oil prices will tend to trade on a combination of physical fundamentals, with an eye simultaneously focused on the paper market. Stay tuned.

5. Carbon price soars on cold weather, EU allocation delays

What's happening? EU carbon emissions allowance prices reached an all-time high of Eur34.86/mt Jan. 7, amid colder than average temperatures across much of Europe as well as a delayed start to carbon auctions and annual free allocation of allowances in 2021. The move came as the fourth trading phase of the EU Emissions Trading System started, with an outlook for tighter supply out to 2030 also supporting longer-term gains.

What's next? The market will be watching closely to see if the rising trend continues. Bullish elements include the ongoing cold snap keeping demand high while supply is curtailed due to daily government auctions remaining on hold. But that could change when auctions resume Jan. 29, bringing supply back into the market. Separately, Platts CORSIA-eligible carbon offset credit (CEC) prices moved up 10 cents to $0.90/mt last week after Democrats took control of the US Senate, suggesting an easier path for President-elect Joe Biden's planned environmental regulatory agenda.

Go deeper: Infographic - EU revamps Emissions Trading System

6. 6. Container rates to UK from North Asia hit all-time high

What's happening? Rates jumped 285% from Nov. 30 to Jan 4 for Platts Container Rate 11 (North Asia-to-UK), hitting $10,000/FEU, an all-time high as demand continues to rise while COVID-related delays at UK ports persist and a lack of empty containers plagues the market.

What's next? Strong rates are expected to continue toward the end of the quarter. Labor is expected to return to key Asian exporting hubs after Chinese New Year faster than in previous years to cope with the additional demand. Some carriers are now no longer taking bookings for loaded containers on backhaul routes from the UK and Europe due to the shortage in empty containers in Asia. These carriers hope that only taking empty containers back to Asia will allow them faster turnaround times, which should ease some tightness in the system.

7. 7. December Europe steel mill spreads close in on 2018 record

What's happening? European hot-rolled coil steel to raw material price spreads climbed in December to Eur368/mt ($449), close to the April 2018 record, as higher spot steel prices pushed up indicative profits from converting iron ore and ferrous scrap to steel. Higher steel prices offset higher iron ore costs, while imported coking coal prices in Europe remained weaker in December.

What's next? Higher European steel prices and rising steel mill utilization rates continue to support margins and steel chain activity in the near term. Lead times are still stretched as steel capacity was slower to meet a recovery in orders during the second half of 2020. EU region mills further increased official price offers last month for new orders, with spot NW Europe HRC prices continuing to rise in January. EU pig iron output in November increased to narrow earlier declines during 2020 aided by expectations of recovery from the COVID-19 pandemic. This could eventually lead to greater steel availability and shorter lead times, pushing domestic steel prices back down and limiting demand for imports.

Reporting and analysis by Ira Joseph, Bruno Brunetti, J Robinson, Anthony Starkey, Alan Struth, Hector Forster, George Griffiths, Frank Watson and Stuart Elliott