Commodity Tracker: 5 charts to watch this week
1. Container logistics issues continue to bite, worldwide
What’s happening? The cost of container shipping has soared over the past year and is hovering at all-time-high levels. Container rates from North Asia to North Continent are eight-and-a-half times higher than a year ago, at $17,000/FEU compared to the $2,000/FEU seen a year ago. This comes as firm demand to move goods across the world continues, especially as consumer spending shifts from services to physical goods during the pandemic. At the same time, factors such as port congestions, equipment shortages, and manpower challenges have prevented supply chains from flowing smoothly.
What’s next? Despite demand starting to fall into the winter months, with many importers already having secured their Christmas stocks, logistical issues continue to dog global supply chains. A gently bearish sentiment is starting to percolate through the supply chain following China’s Golden Week holidays, which gave shipping markets a brief respite. With over 600 container ships currently on order there are hopes from the shipper side that rates will begin to fall as these issues start to ease.
2. Commodities and dollar moves decouple as markets watch US Fed policy
What’s happening? Recently both oil and natural gas, as measured by the GSCI energy subindex, have pushed to new post-pandemic highs and levels not seen since October 2014. The trading community often looks at the relationship between the US dollar and energy commodities, where a weaker US dollar tends to correlate with higher energy prices. This is in part because energy is priced in dollars. Recently there has been a notable strengthening of the US dollar, which normally would be a headwind for energy prices, yet energy prices have remained in a sustained uptrend.
What’s next? Energy ultimately trades on its own supply-demand fundamentals, while the value of the US dollar is subject to a host of broader influences. The US dollar is currently being supported by the prospects for the US Federal Reserve moving its policy rate higher, at some point, along with tapering of its asset purchases, which reduces the size of its balance sheet relative to those of other Central Banks. However, the US dollar could come under pressure from a further, sustained rise in US inflation or continuing gridlock in raising the debt ceiling. In that case, the relationship with energy prices could come back into alignment. It is also feasible that with increased uncertainty about economic recovery in non-US economies, the dollar could remain strong, while energy balances look to stay supportive, at least over the northern-hemisphere winter months when demand increases.
3. US shale drillers show signs of responding to $80/b WTI after months of capital discipline
What’s happening? There are growing signs that US shale producers will start to ease up on capital discipline and start increasing output if WTI crude prices stay near $80/b. North Dakota regulators expect Bakken drillers to start moving rigs and capital back into the basin, while keeping an eye on OPEC+ supply and pandemic infection rates going into winter.
What’s next? The US Energy Information Administration on Oct. 18 will release its November production forecast for the top US oil and gas basins. Output has slowly increased in recent months, mostly driven by the Permian Basin. North Dakota regulators say market dynamics in the coming weeks will be key as operators set capital budgets for 2022.
4. US pipeline operators start to embrace certified natural gas
What’s happening? Some US midstream gas operators have announced initiatives that will make it easier to move natural gas produced in line with certain environmental, social and governance standards directly from producers to end-users. While gas producers including Chesapeake Energy and ExxonMobil have shown enthusiasm for certified gas, utilities have been concerned about how to ensure they were getting cleaner molecules. Now, midstream operators are beginning to announce intentions to dedicate pipeline capacity to certified molecules along certain routes, potentially addressing that problem.
What’s next? As of Oct. 14, companies had committed to certifying nearly 7 Bcf/d of gas production by the end of the year, according to a Platts survey of certifiers. An additional 5.3 Bcf/d is anticipated to come online in 2022, bringing the total to 12.3 Bcf/d, or around 14% of US gas production. The full amount of certified gas coming online is likely slightly higher, as a number of pilot projects have not disclosed their expected volumes. Beyond physical transactions, certificates for environmental attributes – similar to Renewable Energy Certificates, or RECs, in electricity markets – are another possible route for certified gas market development.
5. Corn prices dip below wheat in China as imports cool market
What’s happening? For the first time since November 2020, corn prices in China are now below those of wheat in the local market. Generally, wheat is more expensive than corn. However, a big supply deficit in the local corn market boosted prices of the product in China in 2021. The government responded by releasing wheat stocks from its reserves as a proportion of corn can be replaced with wheat in livestock feed ration. China sold 27.79 million mt of wheat as of May 6 in the government auctions conducted in 2021, already surpassing the 23.23 million mt sold in the whole of 2020. Corn prices began to cool off as imported corn and wheat entered the market.
What’s next? China imported 11.3 million mt of corn in 2020 and imports during January-August reached 21.4 million. Imports are expected to stay high in 2022, although lower than 2021. However, corn imports in 2021 have remained strong despite the robust substitution in feed ration. With the price difference between corn and wheat narrowing, use of corn could return to the usual levels.