As the global coronavirus (COVID-19) case toll rises, what can Chinese refinery activity reveal about the state of oil demand? S&P Global Platts editors examine this and other energy and commodity market trends, including Asian bunker sales, Americas corn exports and more.
1. China, crude and COVID-19: are low prices the best cure for low prices?
What’s happening? The COVID-19 outbreak and resulting economic slowdown has seen refineries slash their run rates, impacting demand for refining feedstocks. This has seen a collapse in the price of crudes sold delivered ex-ship to ports in China. The premium for Lula, a Brazilian crude popular with independent refiners, DES Qingdao over ICE Brent fell to a low of just 66 cents/barrel last week, down from an average of just under $6 a barrel throughout January.
What’s next? Low crude prices are encouraging China’s independent refineries to return to the international market for April and May delivery, reflected in the slight rise in the Lula premium to ICE Brent at the end of last week. But short term buying aside, longer term the demand outlook remains uncertain. Look for a sustained rise in the premium of Lula over ICE Brent as evidence that the economy is at last getting back on it feet.
2. Singapore’s competitive edge in bunkering challenged by Chinese ports
What’s happening? China’s refineries have increasingly geared up to produce low sulfur fuel oil as demand for cleaner fuels has surged due to the International Maritime Organization’s global sulfur limit for marine fuels. In addition, China’s tax waiver on bonded bunker fuel effective February 1 is also set to boost the country’s bunkering prospects. China typically imports about 1 million mt/month of bunker fuel, with the bulk of this from Singapore. The full 13% value added tax rebate for ships using fuel oil as bunker fuel should attract ships on international routes to refuel at Chinese ports, while paving the way for domestic producers to boost bunker fuel output and reduce Chinese imports from Singapore.
What’s next? Singapore’s position as the world’s top bunkering port could be threatened in the new low sulfur emissions world. At the moment, Singapore’s bunker fuel prices are the lowest in the region. With both China poised to contribute substantially to the availability of low sulfur marine fuel in Asia, bunker fuel prices in the region and especially at China’s Zhoushan port, will become extremely competitive.
3. US corn has narrow window in export race against South America
What’s happening? Historically the world’s largest corn exporter — the US, lost its market share in the top importing countries of the coarse grain, Mexico, South Korea and Japan. Meanwhile, Brazil has gained a bigger chunk of the market share in these three countries. Brazil harvested a record corn crop last year, and the ample supplies from that crop were available throughout the year at cheaper prices. After June 2019, when Brazil’s corn supplies started coming in the market, exports from the country surged, while those from the US declined.
What’s next? In the current marketing year which will end in August, the US has got a very small window to push out its supplies to global markets before Argentina comes in with its supplies in March, followed by Brazil in June-July. According to the latest estimates from the US Department of Agriculture, the US is expected to export 43.82 million mt of corn in the 2019-20 marketing year, down 16.5% from 2018-19 levels. Market sources say the country will have to do exceptionally well to meet the 2019-20 target. Since its first estimates made at the start of 2019-20 season, the USDA has already made a steep cutback in US corn export projections by 11.8 million mt.
4. Rhodium’s meteoric rise fuelled by tightening emissions standards
What’s happening? Platinum group metals used in catalytic converters have seen strong demand as higher emissions standard are implemented globally, with rhodium prices soaring faster than other products in the group. Rhodium is considered the best catalyst for the reduction of nitrogen oxides to nitrogen, as well as the oxidation of CO and hydrocarbons, and is seven times more efficient than palladium or platinum. Johnson Matthey’s rhodium spot price in January surpassed the previous 2008 all-time record of $10,100/oz and edged up to $10,775/oz in the first week of February. Rhodium set another new record last Thursday, jumping 3.2% day on day, with spot price at $12,700/oz.
What’s next? Market participants see little downside to rhodium prices. Analysts have said that China is likely to buy whatever rhodium stock it can find in order to meet its China VI emissions targets, even with no global surface stocks of the precious metal available. The coronavirus outbreak could cause a slight reduction in car production over the next two or three months, however.
5. Eyes on regulated nuclear price in France, Europe’s top power exporter
What’s happening? French year-ahead power has fallen to the ARENH regulated price at which EDF sells 100 TWh of nuclear generation to smaller competitors. Above-average temperatures this winter have kept French electric heat demand in check, while strong wind and hydro production have created oversupply conditions across northwest Europe. Even with reduced nuclear availability, prices have continued to fall with cheap gas filling the thermal gap.
What’s next? The French government is in the process of reforming the ARENH nuclear release mechanism. A proposed cap and floor price is to cover all EDF’s nuclear output in future, with a price corridor of Eur6/MWh allowing some flexibility in the central regulated price. The measure, which requires EC approval, could be in place by 2022. Corridor or not, fixing the price for close to 400 TWh a year will fundamentally change Europe’s power markets because France is the continent’s biggest net exporter with a growing annual surplus. French Cal 2022 baseload power has rebounded above Eur47/MWh after EDF management last week said it was confident the reform could apply from January 2022.
6. Appalachian Basin rig counts, production drop as gas prices slide
What’s happening? Persistently low commodity prices this year are beginning to take their toll on US dry gas producers operating in the prolific Appalachian Basin. At the region’s benchmark Dominion South hub, cash prices have averaged just $1.57/MMBtu this month and $1.61/MMBtu, year to date, S&P Global Platts data shows. On February 19, total rig count in the Marcellus and Utica shales was estimated at 50, which is hovering just above a recent 42-month low, according to Enverus DrillingInfo data. Production levels have followed rig counts lower with output this month estimated at 32.1 Bcf/d – about 1.3 Bcf/d or nearly 4% lower compared to a monthly record-high in November.
What’s next? Forwards markets aren’t holding out much hope for a meaningful recovery in Appalachian gas prices this year. On February 19, the balance-2020 forward curve at Dominion South was assessed at just $1.71/MMBtu. According to S&P Global Platts Analytics, average producer cash flows at current price valuations will likely keep production flat this year around 32 Bcf/d, resulting in year-on-year declines by the fourth quarter.