Commodity Tracker: 4 charts to watch this week

This week, our markets take stock of the OPEC+ alliance's decision to hike up output quotas in July and August, as well as the EU's six-month phaseout of Russian crude. Meanwhile, analysts expect China's refinery runs to improve following the lifting of restrictions at key cities.

1. OPEC+ to raise output quotas to 648,000 b/d in July, August

What's happening? The OPEC+ alliance on June 2 agreed to accelerate its production hikes through the summer, raising quotas to 648,000 b/d for July and another 648,000 b/d for August. These volumes are about 50% higher than the typical 432,000 b/d monthly raises that it was currently implementing, though many are unable to raise their output due to technical constraints or internal instability.

What's next? The OPEC+ agreement runs through the end of December, but now all eyes will be on the group as it decides whether and how to extend their market management pact, while the Russia-Ukraine war shows no signs of ending and major economies continue to grapple with record inflation.

2. Russian shut-ins to hit more than 2 million b/d of crude by December

What's happening? The EU will announce a six-month phaseout of 2.3 million b/d of Russian crude imports, plus 1.2 million b/d of product imports over eight months, excluding exemptions for ~300,000 b/d of pipeline crude flows to Hungary and other logistically isolated buyers. The bans were already assumed in the reference case of S&P Global Commodity Insights analytics team, which forecasts Russian production shut-ins to grow from 850,000 b/d in May to 2 million b/d by December.

What's next? By the end of 2022, EU and UK bans will affect 1.9 million b/d of pre-conflict seaborne crude exports, plus 500,000 b/d of Druzhba pipeline shipments. Russian output is already down 850,000 b/d since February, likely facilitated by a full US oil import ban and cuts to refinery runs. S&P Global's disruption outlook thus assumes that roughly half of the banned crude exports to Europe are redirected to Asia and elsewhere, some of which are already taking place. Phaseouts from Japan and potentially other buyers would also need to be offset. Risks to S&P Global's supply forecast are greater to the downside from potential insurance restrictions, secondary US sanctions, an inability to re-route product exports, or unilateral Russian curtailments.

Related factbox: Ukraine conflict boosts Europe's clean energy ambition amid headwinds

3. China poised to see improved refinery levels in the coming months

What's happening? A rebound in domestic oil consumption post relaxation of lockdown measures in China's key cities offers reprise for refiners who had derated due to a combination of demand destruction and reduced product export quota. Runs are estimated to have declined further in May despite private refiners exiting maintenance season as state-owned refiners cope with high inventory pressure due to stock build in the previous months.

What's next? Recovery in China's refinery runs is poised from June and H2 alongside returning demand and expected release of new product export quota. The pace of recovery that Chinese refiners would take strongly hinges on the support Beijing would provide to bolster domestic oil demand as well as product exports. S&P Global Platts Analytics estimates crude runs to grow to a monthly average of 14.4 million b/d between June and December.

4. EU shipping sector assesses impact of inclusion to carbon market

What's happening? The Environmental Committee of the European Parliament voted in May on new proposals surrounding shipping's potential inclusion into the region's carbon market. One of the proposals includes delaying the inclusion of the sector in the EU Emissions Trading Scheme from 2023 to 2024, but require that 100% of emissions from intra-EU voyages be covered from the outset, dropping previous plans for a phase-in period between 2023-2026. An amendment on the draft proposal report also carries the 'polluter-pays principle,' which places the carbon emissions responsibility on shipowners and commercial operators.

What's next? The proposals are expected to be put to a vote in the European Parliament early this month. Negotiations between the European Parliament, Council of Member State and the European Commission is set for September. While the shipping sector must now get to grips with the new timeline, other fundamental concerns remain about how the regulations should be interpreted and how they will work in practice. It also remains to be seen how shipowners will recalibrate and reinvent their fleet.

Related special report: Carbon Neutral Cargo: How Shipping Markets Are Approaching the EU's Emissions Trading Scheme

Reporting and analysis by Herman Wang, Rosemary Griffin, Meghan Gordon, Nareeka Ahir, Paul Sheldon, Shin Kim, Jason Ho, Zhuwei Wang, Chris To.