Commodity Tracker: 5 charts to watch this week

With most Russian gas deliveries being halted due to the war, Europe looks at alternative supplies. S&P Global Commodity Insights editors analyze EuGO prices. Meanwhile, the European compliance carbon market is facing challenges due to reduced emissions forecast.

1. Europe offsetting part of lost Russian pipeline gas with alternative supplies

What's happening? Two years since Russia launched its full-scale invasion of Ukraine, market dynamics have changed(opens in a new tab), with the majority of Russian pipeline deliveries halted, replaced in part by higher imports of LNG and pipeline gas from Norway. The EU has already seen its Russian gas and LNG imports plummet, falling from 155 Bcm in 2021 to 80 Bcm in 2022 and to 43 Bcm last year, according to European Commission data.

What's next? Only a handful of countries still import piped gas from Russia's Gazprom, among them Austria, Slovakia, Hungary and non-EU Serbia. Although Russian LNG supplies to Europe remain relatively robust, they still account for only a small share of Europe's overall gas imports. Now, with the EU giving member states the right to restrict Russian imports at the national level and Austria looking to speed up an exit from Russian gas, the remaining Russian volumes in Europe face an uncertain future.

2. Low natural gas prices reshape 2024 US drilling outlook

What's happening? Historically low prices at the US benchmark Henry Hub this year are keeping pressure on drilling margins for dry gas producers, reshaping the outlook for annual production growth. In 2024, NYMEX prompt-month futures have averaged just over $2.35/MMBtu to trend at their lowest year-to-date price since 2020. Over the past four weeks, mild US temperatures, flagging gas demand and bearish weather forecasts have sent futures prices even lower to the upper-$1 range.

What's next? During recent earnings calls, some of the largest gas producers in the US announced downward revisions to their 2024 guidance in response to low prices. While most producers are now planning to keep production flat, others like Chesapeake Energy and Coterra Energy have announced capital spending and activity cuts that could result in lower annual production. Although healthy margins for oil producers will likely keep associated gas production in the Permian and other oil-directed basins growing this year, growth could stall in dry gas plays like the Haynesville, the Marcellus and the Utica.

3. EuGO: Demand growth in focus as hydro issuance normalizes, wind surges in 2023

What's happening? The issuance of European Guarantees of Origin for December 2023 rose 29% compared to December 2022, leading to a reduction in EuGO prices. Hydro generation has largely normalized, with 2023 hydro issuances being the second highest in history since 2021. In 2023, Europe (AIB countries) installed 59.6 GW of hydro and renewable energy capacity, more than 10% higher than the previous year. Wind generation grew over 100% in December compared to September 2023, significantly impacting the supply of GOs. However, overall demand growth dipped 0.6% in AIB countries in 2023.

What's next? Nordic Hydro GO prices for the current year have dropped to Eur2.2/MWh. Near-term prices will continue to be under bearish pressure due to normalizing hydro and weak economic activity. However, S&P Global Commodity Insights analysts expect to see higher prices in the coming years due to the anticipated increase in demand caused by new EU sustainability reporting standards. Outside of hydro, the supply issuance increase seen in 2023 is not large enough to meet the prospective demand increase.

4. EU carbon market faces bearish trends as emissions decline

What's happening? Europe's compliance carbon market is facing bearish trends(opens in a new tab), with reduced power plants emissions forecast, soft gas prices and the EU's "front-loading" program to bring forward some allowance auction volumes to 2023-2026 from 2027-2030. This could provide some 2,200 shipping companies with more opportunities(opens in a new tab) to buy greenhouse gas emissions allowances at a market trough. They are required to participate in the Emissions Trading System for the first time this year.

What's next? In their latest monthly market outlook, S&P Global analysts expect average EU Allowance prices to fall from Eur85.3/mtCO2e in 2023 to Eur63.9/mtCO2e in 2024 before recovering to Eur82/mtCO2e in 2025. Many shipping companies will need to overcome administrative backlogs before formally joining the market. The European Commission requires those in the maritime sector to file their applications within 40 working days from Jan. 31, and industry participants said shipping registries could collapse due to the large amount of paperwork.

5. European acetone prices soar on tight supply

What's happening? The price of European acetone hit Eur1,275/mt FD NWE, the highest in 10 months, on the back of tight supply in the spot market. This was underpinned by Ineos' recent force majeure declaration at its Gladbeck plant, on top of already low production rates, leading to a significant uptrend in prices, market sources said. Although the arbitrage window was open from Asia to Europe, market participants are not risking bringing material to Europe due to Red Sea disruptions. While acetone prices reached levels as low as Eur1,020/mt on Jan. 23 due to very weak demand, prices picked up due to low operating rates, as well as supply hiccups, sources said.

What's next? Some easing in supply tightness might be seen when operating rates improve. However, a heavy maintenance period is ahead this year, with major producers planning their maintenance mainly from Q2 to Q3, translating to fairly tight conditions throughout the year.

Research and analysis by Stuart Elliot, J Robinson, Danylo Babkov, Max Lin, Maria-Eleni Tsimeki