COVID 19: Coronavirus Outbreak

Commodity markets continue to watch US inflation data closely, while Asian oil refiners wait for developments in US-Iran talks that would allow a resumption of the latter country’s crude flows. Plus, UK nuclear power and winter capacity, and South American soybean oil prices.

1. Energy markets mull inflation trend: COVID phenomenon or a structural shift?

US consumer price inflation and personal consumption index

What’s happening? The US Bureau of Labor statistics released their consumer price inflation statistics for May which indicate a continuing acceleration of inflation. Overall inflation rose to 4.9%, while core (ex-food and energy) inflation rose to 3.8%, but from a low base due to pandemic impacts. More telling, overall inflation showed acceleration to 6.9%, annualized, on a 3-month over 3-month basis, while core accelerated to 5.2%. The acceleration was beyond expectations: it indicates inflationary pressure is continuing to build.

What’s next? The US Federal Reserve has already indicated it sees these inflationary impacts as “transitory”, and has outlined a framework for allowing inflation to remain elevated and focus on “average inflation” and sustainability against its 2% target. The rise in implied inflation has been constructive to the continuing rise in commodity prices. The debate is whether the rise in inflation represents the cyclical impact of coronavirus, or structural shifts in labor markets and supply chains. If the impacts are more structural, it would prompt the FED to pull forward their timeline for tapering and rate increases. These are currently outlined by them as 2022-2023, but the market appears to be anticipating action sooner.

2. Return of Iranian crude could displace Mexican, Russian grades in South Korea

South Korea crude imports and Mexico Russia grades

What’s happening? South Korea completely halted imports of Iranian crude and condensate since May 2019, and refiners including SK Energy and Hyundai Oilbank were since then raising purchases of Mexico’s Maya crude and Russia’s Urals Blend as alternative feedstocks to Iranian Heavy and Forozan crudes.

What’s next? South Korea will likely alter its crude oil procurement and trading strategy if the sanctions on Tehran are lifted, with Mexican and Russian suppliers poised to lose a big portion of their market share in the world’s fifth largest crude importer.Major South Korean refiners said Maya and Urals could lose out when Iranian oil returns to the international market. The country’s refineries were all primarily designed and configured to process Middle Eastern sour crude, hence it is a lot more effective in technical terms to feed the systems with Iranian oil rather than crude from the Americas and Europe, industry and refinery sources said.

3. Another hit for UK power generation as Dungeness B closes early

UK Day-ahead baseload price

What’s happening? UK nuclear generator EDF Energy closed its 1.25-GW Dungeness B nuclear plant with immediate effect June 7, throwing in the towel on efforts to keep the ageing plant going to 2028. The duel advanced gas-cooled reactor (AGR) power station in Kent had been offline since September 2018 due to “significant and ongoing technical challenges.” In particular, changes to the condition of hard-to-access boilers within the reactors themselves contributed to a final decision to close the site.

What’s next? While market players said Dungeness B’s absence had been priced into winter 2021-22 contracts, its closure adds downside to the UK’s deteriorating dispatchable plant outlook. Adding the early closure of reactors at Hunterston B and Hinkley Point B by the middle of 2022, UK installed nuclear capacity will have fallen by a third from current levels to 6 GW by end-2022. “With Calon’s gas fleet expected to be out of action this winter and the Drax and West Burton coal plants only available in extreme conditions, we are likely to see a repeat of last winter’s extreme prices (see chart) in the event of cold, still weather, particularly if power demand recovers from the lockdown-limited levels seen last winter,” said S&P Global Platts Analytics’ head of European Power Analysis, Glenn Rickson.

4. South America soybean oil basis plunges as Chicago futures remain supported

South American soybean oil prices diverge from Chicago futures

What’s happening? South American soybean oil FOB differentials or basis to correspondent Chicago Board of Trade futures have plunged to considerable lows due to a combination of surging CBOT contracts and limited export demand, with outright prices in Argentina and Brazil still at historical high levels. The Argentinian FOB Up River basis dropped by 1,100% year on year, while the Brazilian FOB Paranagua basis fell by 837% over the same period.

What’s next? Despite lower FOB differentials or basis, outright USD per metric ton prices in Argentina and Brazil remain at high levels because of the current CBOT futures levels. Market analysts say Chicago’s contracts should remain supported by expected tight global stocks and prospects of growing biofuels demand in the US as the country recovers from coronavirus-related economic impacts.
Source: Platts