Commodity Tracker: 5 charts to watch this week

The continued rise of iron ore prices is in focus this week, along with Chinese steel sector trends that will influence demand. S&P Global Platts editors and analysts also look at oil supply, demand and price trends, and anticipate the European Commission's upcoming climate policy package.

1. Iron ore prices surge despite high ferrous scrap imports to China

What's happening? China's recycled steel imports hit 114,741 mt in May, more than 28 times the volume seen in January, when the country lifted import restrictions on ferrous scrap. Despite the growing volume, iron ore prices continued surging to all-time highs, propelled by recovering global steel demand.

What's next? China's emission and production controls in the steelmaking sector in the second half of 2021 are expected to turn the tide for raw material demand, for the worse. However, the same environmental goals could play in favor of recycled steel in the longer term as China expands its electric arc furnace capacity, which releases less carbon emissions and uses ferrous scrap as the main feedstock. S&P Global Platts Analytics expects China's EAF steelmaking capacity to increase by 17 million mt/year in 2021 to about 198 million mt/year.

Interactive: Platts Iron Ore and Metallurgical Coal Specifications Tree

2. Asian consumer demand recovery hinges on OPEC+ stance

What's happening? With ultra-low interest rates and aggressive monetary easing policies expected to continue supporting broad assets, commodities and energy prices, Asian end-users and consumers are increasingly hoping for OPEC+ to at least play its part in controlling the highly inflated oil prices, for the benefit of global consumer sentiment and demand recovery. However, the group's decision on raising collective crude output by 400,000 b/d each month from August to December remains on hold for now as the UAE and Saudi Arabia look to resolve disagreements.

What's next? Indecision from OPEC+ on raising crude production may continue to sustain the benchmark oil price uptrend, leading to high retail fuel prices and hampering Asia's consumer demand recovery, according to industry officials and refinery sources across Asia. Seoul-based analysts said lofty retail prices could potentially chip off around 10,000-20,000 b/d of South Korean demand as many passenger car owners are opting to drive less, while some construction companies are putting their projects on hold until diesel prices pull back.

Further reading: OPEC+ hikes June output by 540,000 b/d amid higher demand for crude

3. Wide Forties vs Urals spread could prompt switching among European refiners

What's happening? The price spread between Forties FOB and Urals CIF Rotterdam is extremely wide on a historical basis at over $4/b. This provides compelling economics for switching to Urals by European refiners with the flexibility to do so.

What's next? Forties Blend crude output is expected to average 273,100 b/d in July, 299,400 b/d in August, 293,000 b/d in September and 323,000 b/d in October, according to Forties Pipeline System operator Ineos. As for Urals, total shipments in July are scheduled at 5.895 million mt, down 1.365 million mt (375,000 b/d) from June—making it the smallest Urals monthly loading program since April. S&P Global Platts Analytics expects less backwardation on the Dated Brent curve, some softening in Forties physical differentials, and some strengthening on Urals physical differentials as a mechanism to correct the current divergences in the market.

4. EIA boosts US oil production and price outlooks, but major risks ahead

What's happening? The US Energy Information Administration said in its latest Short-Term Energy Outlook released July 7 that US drilling activity will likely start to pick up by the end of the year and climb more steadily into 2022 if the current higher prices hold. Investors continue to demand capital discipline that prioritizes shareholder returns over production growth, but EIA said this could change if WTI prices remain above $60/b.

What's next? EIA expects US crude production to average 11.2 million b/d in the third quarter before rising more steadily, from 11.3 million b/d in Q4 2021 to 12.2 million b/d in Q4 2022. EIA now expects average 2021 crude prices of $65.85/b for WTI and $68.78/b for Brent and average 2022 crude prices of $62.97/b for WTI and $66.64/b for Brent. Still, there are major risks ahead, such as the debate over production limits within the OPEC+ alliance, as well as the spread of coronavirus variants and slow vaccination campaigns in many countries.

5. European Commission set to unveil ambitious 2030 climate package

What's happening? Draft documents leaked in late June showed the European Commission plans to increase the EU Emissions Trading System Linear Reduction Factor--the rate at which the annual carbon caps decline to 2030—within a year of the new legislation taking effect. No percentage rate was provided, but the measure will effectively tighten supply of allowances at a faster rate than the currently planned 2.2%/year, to align the EU ETS with the new EU 2030 emissions reduction target of at least 55% below 1990 levels.

What's next? The EC is due to unveil a package of 2030 climate proposals on July 14, ranging from the revision of the EU ETS and energy taxation to new proposals on maritime and aviation fuels. Also due are an upgraded renewables directive, raising the target share of renewables up to 40% by 2030, and a new Carbon Border Adjustment Mechanism, placing a charge on the carbon content of EU imports of electricity, metals, cement and fertilizers.

Further reading: EU carbon market extension 'high risk, low reward for consumers'

Reporting and analysis by Yuchen Huo, Samuel Chin, Clarice Chiam, Mark Tan, Phil Vahn, Sergio Baron, Meghan Gordon, Henry Edwardes-Evans, and Frank Watson.