Commodity Tracker: 6 charts to watch this week

Commodity Tracker: 6 charts to watch this week

China’s latest economic data continues to paint a subdued picture for commodity and energy demand, while lower drilling counts in the US raise questions about the pace of future supply growth. S&P Global Platts editors shed light on these and other trends, including a Nordic wind power boom, US-Turkey steel trade, and more.  

1. China and commodities: a tale of two inflations


China economic indicators

What’s happening? China’s consumer price index (CPI), released last week, hit a nearly 6 year high, as pork prices drove it higher following a more than 40% decline in China’s pig herd due to African Swine fever. This has caused much consternation among consumers, with the average price of pork nearly doubling since the beginning of the year. It’s also a major concern for the Chinese government, which wants to avoid a discontented populace. But strip away food and energy, and inflation is the lowest it’s been for over three years, due primarily to weak demand. The Producer Price Index (PPI) – reflective of prices at the factory gate also declining to their lowest level for more than 3 years, as low commodity prices due to weak demand feeds through to lower prices at the factory gate and weakening industrial profits.

What’s next? China’s latest GDP data was released last Friday, which showed real growth the lowest it’s been since 1992 when quarterly figures were first reported. Or nearly 30 years. But don’t expect the stimulus cavalry to ride to the rescue – the government doesn’t want to flood the economy with liquidity, create more unproductive white elephant projects and pile more onto China’s already considerable pile of debt.  A pickup in the global economy or a resolution of the trade dispute with US may help boost demand at the margin, but with a slowing domestic economy, Chinese commodities and energy demand has probably tuned a corner – the future is likely to be a case of lower for longer.


2. US drilling decline stokes concerns over pace of shale supply growth


US rig counts for top oil plays

What’s happening? US oil and gas rig counts dropped to their lowest level since mid-March 2017 last week fueling market concerns that a protracted oil price bear market stoked by recession fears will stunt the outlook for US shale supply growth. The US oil and gas rigs fell by 19 to 900, according to Enverus/DrillingInfo, with the drop coming almost totally from oil-directed rigs, which fell 18 to 724. The data shows a large drop occurred in Texas’ Fort Worth shale area, where rigs fell to six in the week to October 11, from 12 the previous week. Among large shale basins, the biggest changes in rig counts came from the Permian Basin of West Texas/New Mexico and the SCOOP-STACK in Oklahoma.

What’s next? With Brent crude prices lingering at or below $60/b since the start of the month due to demand-side concerns, talks of renewed capital disciple and consolidation among shale industry players have resurfaced in recent weeks, particularly among small-to-midcap operators. The market will likely be watching for any further signs that US drilling activity is slowing in response capex cuts to gauge the likely impact on US oil supply forecasts. The International Energy Agency recently trimmed its oil supply outlook for US oil growth in 2019 and 2020 to reflect the drilling slowdown.


3. Nordic wind boom to be felt across Europe


Nordic power interconnectors to Europe by 2030

What’s happening?  The Nordic wind boom is driving the region’s electricity surplus up. By 2025 the surplus is forecast to reach 45 TWh. This cheap power needs a home, and Norway, Denmark and Sweden plan to double interconnection capacity to 2030. Great Britain and Germany will be the main beneficiaries, with the Netherlands and Baltics also.

What’s next? The supply gains are forecast to outweigh demand gains with new interconnectors helping to integrate plentiful Nordic hydro and wind, while supporting Nordic power prices, already at a discount to most European markets. For 2020, Nordic power is over Eur10/MWh cheaper than that in NW Europe. Should, however, the wind blow more in Germany or the UK, the new cables could also help preserve Nordic hydro reservoir stocks, that can as seasonal storage during the winter peak.


4. Trump’s threat to hike Turkish steel tariff rattles market


Turkey steel exports to US 2018 2019

What’s happening? Turkey-US trade in steel was plunged into uncertainty last week, when US President Donald Trump threatened to re-impose 50% tariffs on steel imports from Turkey, as relations with the country became strained over the situation in Northern Syria. Turkish steel export volumes to the US dropped sharply after US President Donald Trump raised Turkey’s steel tariff rate from 25% to 50% in August 2018, amid increased political tension between the two countries due to the detention of US Pastor Brunson in Turkey. The US import tariff on Turkish steel was later dropped back to 25% in May 2019, but this has so far not triggered the notable rise in export volumes to the US that Turkish producers expected.

What’s next? The prospect of a return to 50% tariffs last week led to the cancellation of recently agreed rebar contracts between US buyers and Turkish mills. Despite Trump calling off the threat on Friday, the uncertainty could have a further chilling effect on steel flows between the two countries, with US buyers now looking to Southern Europe as an import alternative.


5. Volatile European gas prices stir Norwegian gas flows


Norway gas flows to Europe

What’s happening? Norwegian gas flows to continental Europe and the UK are on the rise, a sign that state oil and gas company Equinor’s commercial turndown may be coming to an end. The flows were triggered by a sharp increase in gas prices mid-October, before a milder forecast October 17 took the shine off the market.

What’s next? More exports means more supply in what remains a fundamentally bearish gas market, so expect further European gas price volatility after major swings in pricing over the past few weeks. If Norwegian flows continue at current levels and forecast healthy LNG supply materializes, prices above Eur12/MWh at the benchmark Dutch TTF hub are seen as unlikely by S&P Global Platts Analytics.


6. US-Brazil corn export price spread narrows


US vs Brazil corn export prices

What’s happening? Export prices for the US corn have reduced in comparison with Brazilian corn in recent weeks. The US and Brazil are huge corn producers and compete for export share. Around May, US corn prices rose on the back of difficult weather conditions that led to historical delays in corn planting. This benefited Brazil’s corn exports. However, in recent weeks, corn prices FOB US Gulf have narrowed the gap to FOB Brazil, Santos. In the week to Oct. 11, US corn prices were seen lower than Brazil’s.

What’s next? The market will be watching whether the US is able to boost its corn exports due to the narrowing spread with Brazil. Analysts have mixed views on the situation, but some expect a seasonal pickup of pace in US exports, led by upcoming harvest pressure and the dollar backing off a bit, which would make exports more attractive.

Reporting by Andreas Franke, Henry Edwardes-Evans, Kira Savcenko, Viral Shah, Abdulrhman Ehtaiba, Sebastian Lewis, Rob Perkins, Rohan Somwanshi, Mugunthan Kesavan

The post Commodity Tracker: 6 charts to watch this week appeared first on Platts Insight.

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