07 Dec 2020 | 09:30 UTC — Insight Blog

Commodity Tracker: 4 charts to watch this week

author's image

Featuring S&P Global Platts


In this week's Tracker, S&P Global Platts editors consider the latest OPEC+ announcements on production cuts, with an eye to the varying degrees of economic stress on producer countries affected by the restrictions. Plus: Nord Stream 2 stutters back into construction with pipelaying offshore Germany; rising implied inflation suggests support for commodities; and an upturn for indicative steelmakers' margins.

1. OPEC+ makes minor tweaks to output cuts, renews focus on compliance

What's happening? Unable to agree on a long-term production plan, OPEC+ countries announced on Dec. 3 they would only ease production cuts by 500,000 b/d in January, with further revisions on a month-by-month basis, as the producer group aims to carefully calibrate its response to the demand recovery.

What's happening? Although the deal swiftly boosted crude oil prices, the latest round of fraught negotiations will draw further scrutiny of the group's production discipline. The pandemic continues to amplify the economic disparities within the alliance — as displayed in the infographic — with the output cuts placing much greater pressure on some members than others. The latest OPEC+ production levels for November, to be revealed in S&P Global Platts' survey due out this week, will give an indication of the state of play.

2. Nord Stream 2's painstaking progress puts spotlight on Ukraine gas transit

What's happening? The Gazprom-led Nord Stream 2 development company is resuming work this month on laying the controversial 55 Bcm/year gas pipeline to Germany. Pipelaying for the almost-complete line will take place in shallow waters offshore Germany during December, with a small 2.6 km section expected to be laid. Without Nord Stream 2, Gazprom will have to rely on Ukraine for gas transit to Europe for more volumes than envisaged under their five-year agreement signed in December 2019.

What's next? The bigger question is how and when Nord Stream 2 will be able to lay the pipeline in the deeper waters off the Danish island of Bornheim. US sanctions specifically target companies helping to lay pipeline in deeper waters. Gazprom has agreed to transit only 40 Bcm via Ukraine in 2021, but with Nord Stream 2 still incomplete, it will likely need more capacity, which it will have to pay extra for.

3. Rising implied inflation lifts commodities complex

What's happening? A general "risk on" environment for asset prices has emerged and is being reflected in a rise in implied inflation (nominal interest rates, minus inflation protected rates) and new equity market records. Along with that, the US dollar has been falling broadly against most major currencies, declining about 12% since its March low. This has been accompanied by an uplift in commodity prices — represented in the chart by the S&P GSCI — though within the complex, energy has lagged until recently.

What's next? Implied inflation will tend to rise as the economy heals from the ravages of the COVID 19 pandemic. Implied inflation is still short of the FED's target rate of 2%, but accommodative monetary policy and fiscal stimulus support continues to expand liquidity. Such expansion tends to foster higher inflation and aligns with a weakening value of the US dollar. This all supports stronger commodity prices - energy participates in this broad trend but to a lesser degree, as its own supply-demand dynamics have a strong influence.

4. Global steel price rise lifts producers' indicative margins

What's happening? Global steel spreads and indicative steel margins increased in the fourth quarter due to recovering demand that supported flat steel prices. The higher steel prices offset raw material costs including iron ore, which in December reached 7-year price highs. US hot-rolled coil to ferrous scrap spreads led the increase for electric arc furnaces able to supply flat steel. European HRC-raw materials spreads at blast furnaces rebounded in November to the highest in two years, while still well below a peak in 2018. In China, higher import iron ore prices and coking coal costs have limited further gains for margins, even as steel prices rose.

What's next? A further recovery in steel mill utilization rates from low levels during Q3 may help steel supply catch up with orders next year, reducing pressure on spot prices and putting an emphasis on further steel demand growth. Higher demand and steel orders placed through the first half of 2021 could help boost finished steel demand and production estimates, which the steel industry expects may remain below pre-COVID levels in major global markets next year, with China stabilizing. Iron ore supply is set to increase in 2021 from Vale in Brazil, and new projects are starting in Western Australia.