A contrast last week between two major globally traded commodities – coal and oil – at the centre of the price surge post the Russian invasion of Ukraine.
Prices for both remain at elevated levels, even after falls last week, but while oil bumped higher on Friday, coal continued to ease.
Volatility has not abated for oil as the war in Ukraine continues with prices holding above $US100 a barrel for the two global marker crudes – Brent (around $108 a barrel) and West Texas Intermediate (US, around $US103). They were down around 3.5% for the week.
And another form of carbon, coal prices fell last week with no respite, despite continuing reports of strong buying interest from Europe – down by $US100 a tonne (20% or more) or more, depending on quality and time of year.
Interestingly, gas prices have also gone off the boil – prices in the JKM (Japan Korea LNG Market) – the primary pricing point for the huge north Asian LNG market – are down 15% to 20% in the past week, depending on the futures month being used for comparison.
That partly reflects the end of the winter heating season in China – the time of peak energy demand, even though there were widespread snows in the north and Beijing late last week.
The rising number of Chinese covid infections, lockdowns and restrictions on movement have also played a part in the weakening in LNG and thermal coal prices.
Oil though remains the primary price driver – supplies are tight, prompting the International Energy Agency (IEA) to urge OPEC countries to significantly increase production at their next monthly summit.
For the time being, the cartel remains unmoved by these demands and is sticking to its 400,000 barrels a month reduction in the global production quotas.
On Thursday, Morgan Stanley raised its Brent price forecast for the third quarter by $US20 a barrel to $US120 a barrel. Goldman Sachs has raised its forecast to $US135 a barrel for the year, but said Brent could reach as high as $US175.
For coal, a very different picture and one that will eventually impact Australian exporters.
The key global pricing market is the Newcastle thermal coal topped out at the peak of the concerns a week or so ago the futures price was $US439 a tonne. On Friday it was around $240 a tonne for the April contract. The May contract was lower at $US230 a tonne.
Last October these levels were the peaks when coal prices soared as China ran short of coal and was forced to start power rationing.
Once that crisis was over, thermal coal prices fell to around $US185 a tonne in late November – early December but started rising as Vladimir Putin stepped up threats against Ukraine; jumped with the invasion on February 24 and took off when Putin started muttering about nuclear options 10 days or so into his stuttering campaign.
Steel-making coking coal prices have eased to around $US350 from more than $US600 a tonne in the two weeks as well.
The fall in coal mirrors a fall in gold prices, but not oil or copper (around $US4.70 a pound or more than $US10,140 a tonne). Gold is back down around $US1,920 an ounce and could go lower.
Shortfalls in Indonesian coal exports because of wet weather (which have delayed exports from NSW) have added to a shortage of thermal coal, as did the export banks in January.
At the same time the resurgence of coronavirus cases in China, the biggest producer and consumer of coal, is raising concerns over weaker future demand.
Coal output in China rose 10.3% in January and February from a year ago after Beijing asked miners to ramp up production for the winter season and amid the export ban in Indonesia in January.
Coal demand from Europe remains high due to supply-chain disruptions and low inventories and while coal isn’t part of Western sanctions on Russia, buyers in Europe and Asia are scrambling to fill shortfalls in supply from Russia later this year.
With domestic thermal coal production in Europe falling (as renewables rise), Russia now supplies about 70% of imports. Coal from Indonesia and Australia is being chased to fill the potential gap but Indonesia, worried about stability of its own supplies, will be a reluctant supplier.
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Finally, oil markets are waiting for a deal with Iran to be struck.
Chances are rising that we will see a return to the 2015 deal would in turn allow the return of millions of barrels of Iranian oil back on global market at a time when crude prices have hit their highest levels in more than a decade because of Russia’s invasion of Ukraine.
The release last week of two British-Iranian dual nationals from years of Iranian detention back to the UK has improved prospects for an agreement, as has the payment of more than half a billion dollars by the UK to Iranian for a payment not made because the two people were being held captive.
Russia last week dropped threats to sink the revival of the 2015 Iranian nuclear deal over recent sanctions imposed over its invasion of Ukraine, reopening the way to an agreement after nearly a year of talks.
A return to the 2015 deal, which originally lifted sanctions on Iran in return for limits on its nuclear program, would see the return of at least 2.5 million barrels of oil a day or more of Iranian oil back to global markets.
This would “boost global oil supplies and could put downwards pressure on prices,” James Swanston, Middle East and North Africa economist at London-based firm Capital Economics, wrote in a note late last week adding that “it may also help to ease geopolitical tensions in the region.” Still, a return to previous production levels will take time.
Saudi Arabia is not happy because the extra oil is not be included in the production cap that the OPEC+ group (which involves Russia) has in place and is being reduced by around 400,000 barrels a month. The Saudis (Sunni Muslim) and Iranians (Shia) are religious enemies.
But with the International Energy Agency warning that the global oil market could be short up to 3.5 million barrels a day from April because of western sanctions on Russia and self-sanctioning by many large and small foreign oil groups (led by BP, Shell, Exxon Mobil), the extra Iranian oil could go a long way to filling that gap.
Commodities analysts at S&P Global Platts reckon that if sanctions were to be lifted on Iran immediately, it could export an additional 500,000 barrels of oil a day to markets from next month, with that figure reaching an additional 1.3 million barrels per day by the end of this year.
Iran was the fifth-largest producer in OPEC in 2020. Before the Donald Trump administration unilaterally ditched the deal in 2018 and re-imposed harsh sanctions on Iran’s economy, the country was producing 3.8 million barrels of oil a day.
This later dropped to as low as 1.9 million barrels and is currently about 2.4 million barrels a day, according Western estimates.
Some analysts reckon the news of the Iranian sanctions ending could send oil down $US3 a barrel right away and more once the market gets a better idea of how much volume will be delivered.
Friday’s rise didn’t reflect any fears about the Iranian sanctions coming off, but many in the market reckon it is only a matter of time.
And beyond a deal with Iran, a possible deal between the US and the extremist government in Venezuela to help it boost oil output and exports.
A small positive is continuing weak import figures from China.
Imports and demand from refineries continue to trend lower than in 2021 – partly due to weaker demand for product but also a government crackdown on small to medium independent refiners who often traded their import quotas as much as their physical oil supplies.
Retail prices for petrol and diesel have been suppressed to keep inflation low and the independent refiners have responded by cutting production.
