The IEA’s bullish assessment for oil demand in 2021 and continuing strength in European carbon markets top this week’s selection of key commodity trends. Plus, Turkish steel, ESPO Blend crude oil demand and US corn prices.
1. IEA sees oil demand rebound outstripping supply this year
What’s happening? Global oil demand recovery is set to outstrip growth in supplies this year as activity bounces back sharply from pandemic lockdowns, according to the International Energy Agency. The IEA sees a major demand rebound of some 6.5 million b/d between the first quarter and the end of 2021, and forecast May 12 that likely supply growth by the OPEC+ group and others would be “nowhere close” to the expected demand increase. It also gave a lower estimate for US oil output this year compared with last month’s report, with an expected contraction of 160,000 b/d, due both to lower shale activity and reduced expectations of some Gulf of Mexico fields.
What’s next? The report implies a need for OPEC+ to relax its production curbs even if US sanctions against Iran are eased later this year. Under the current OPEC+ production scenario, oil supplies won’t rise fast enough to keep pace with the expected demand recovery, the IEA said. Market watchers will remain focused on India’s COVID-19 crisis and the potential for new, more contagious strains of the virus to derail the ongoing easing of lockdowns in the US and Europe, where the biggest oil demand rebound is expected this year.
2. EU carbon bull run foreshadows first UK ETS auction
What’s happening? European gas and carbon prices extended solid gains into May, with EU CO2 allowances trading above Eur55.00/mt for the first time. The front-month gas contract in the benchmark Dutch market, meanwhile, rose above Eur26.00/mt, five times higher on the year due to a combination of low storage levels after a prolonged period of higher heating demand, and higher Asian LNG prices pulling cargoes away from Europe. Needless to say, European power prices are at multi-month highs, front-month German baseload nearing Eur66.00/MWh May 13.
What’s next? Markets will be watching closely to see if EU carbon prices have further upside or whether the recent gains prompt some profit-taking. Eyes will also be focused on the UK as companies get their first taste of carbon pricing under the country’s domestic Emissions Trading System with the first carbon auction set to take place on the ICE Futures Europe exchange May 19, along with the start of UK carbon allowance futures trading.
3. Turkish export rebar prices approach 13-year high, further upside possible
What’s happening? Turkish export prices for the construction staple, steel rebar, soared to a near 13-year high of $770/mt FOB May 14 after the removal of 13% Chinese steel export rebates on May 1 boosted Turkish rebar competitiveness in the regional Asian steel market. Turkish mills’ lead times for export rebar have extended as far ahead as late July and August shipment, with strong sales to Latin America, Asia and the EU. Mills have taken advantage of firm downstream demand in the global construction sector, driven by government fiscal stimulus to support the economic recovery out of the coronavirus crisis.
What’s next? Some Turkish mills were already citing offers as high as $800/mt FOB, a level not seen since 2008, with market participants expecting further upside in the near-term, citing $100/mt import arbitrage into Asia. Others were more cautious, pointing to sharp recent falls in the Chinese physical and steel futures markets over May 13-14.
4. Aframax rates see uplift amid changing ESPO crude flows
What’s happening? Crude imports by China’s independent refining sector in April tumbled to a four-month low at 3.64 million b/d, due to heavy refinery maintenance and high feedstock inventories at ports. Far East Russian ESPO Blend crude is the top feedstock grade for independent refineries, but private refiners’ ESPO imports tumbled almost 20% on month to 1.17 million mt in April. As a result, Aframax tanker rates have fallen sharply since late March. The Kozmino-North China Aframax rate fell to $4/mt May 4, down 24% from the year-to-date peak of $5.25/mt on March 30. At present, Aframaxes barely earn $2,500-$4,000/day on some of the key routes in the East of Suez region, according to shipping sources.
What’s next? Crude cargo arrivals in May are likely to remain low due to ongoing maintenance. Around 21.2 million mt/year of refining capacity was offline across seven of the independent refineries in April and an additional 3.5 million mt/year of capacity will be offline this month. However, it isn’t all doom and gloom for Aframax tanker owners, as crude buyers in the US West Coast have emerged in the Far East Russian spot market and started to arrange multiple long-haul Kozmino-USWC charters to carry medium sweet ESPO. US demand for such grades that are especially rich in middle distillates will rise for gasoline production as summer driving season approaches, while the latest pipeline crisis in the US called for rapid fuel supply replenishment.
5. US Corn backs off highs as production estimates rise
What’s happening? US corn prices have retreated from 13-year highs as the latest US Department of Agriculture report increased production estimates for the 2021-22 marketing. The report also showed a cut to exports and an increase to US ending stocks. Export demand has also been rolling from old crop corn to new crop which has put some downward pressure on nearby prices while supporting prices further down the curve. The USDA’s weekly net export sales data that showed a net reduction of 113,360 mt for the week ended May 6, which was a marketing-year low.
What’s next? Prices have been historically high and the overall export outlook remains strong. The May WASDE report showed robust Chinese corn demand likely to continue, with 26 million mt listed for the 2021-22 marketing year. This has been further supported by a surge in recent buying activity with large corn sales triggering daily export announcements for China in the last week totaling 5.1 million mt since May 7, for delivery during the 2021-22 year. US corn planting is underway, while in Brazil the weather is being closely watched, as dry conditions in Brazil that have lowered expectations of the safrinha crop.
Reporting by Robert Perkins, Viral Shah, Andreas Franke, Frank Watson, Philip Vahn, Vickey Du, Luke Lundgren and Sophie Byron
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OPEC+ Oil Output Cuts