Commodity Tracker: 5 charts to watch this week

The climate agenda is on top of S&P Global Commodity Insights editors' list this week, with the UN Climate Change Conference, or COP28, kicking off in Dubai at the end of the month. In Europe the French nuclear output is in focus ahead of winter, while in Asia refiners are looking at low-sulfur crude from the US and Africa.

1. COP28 to facilitate cutting fossil fuels, tripling renewables and enhancing carbon market

What's happening? The UN Climate Change Conference, or COP28, to be held in Dubai from Nov. 30 to Dec. 12, will facilitate cutting fossil fuel consumption, tripling renewable energy outputs by 2030, and restoring confidence in the carbon market amid fierce media criticisms and declining carbon prices. For this COP to be successful, it is also important to establish a funding mechanism, which enables financial supports to be channeled from developed countries to developing countries in a timely manner and ensure a just transition.

What's next? COP28, to be held in the hydrocarbons-rich Middle East, has the oil industry's decarbonization in focus. Meanwhile, countries will work toward achieving the commitment in the G20 Leaders' Declaration released in September to drive renewable outputs and accelerate capacity additions especially in developing countries.

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2. French nuclear responds to winter cold snap

What's happening? French nuclear output has risen to its highest level since February as operator EDF reacted ahead of a first cold snap of the winter. Output peaked Nov. 27 to just above 43 GW in response to electricity demand projected to peak at 70 GW, system data showed. Windy, wet and a relatively mild weather over the past few weeks had kept November's nuclear generation on a par with October, averaging around 38 GW. France's highly electrified domestic heat demand ensures the country's power demand is highly sensitive to cold spells, with every 1 C drop in temperature below winter norms resulting in a 2 GW-plus increase in demand.

What's next? Five French reactors are scheduled to restart over the coming days, lifting availability close to 50 GW before a second cold spell early December is forecast to lift peak demand to 77 GW. Prompt power prices have risen only slightly amid the swing in the weather as higher nuclear availability is to offset some of the demand gains. This reduces risk for price spikes as seen during an early December 2022 cold spell when French nuclear averaged 37 GW. S&P Global Commodity Insights analysts forecast this December's nuclear output to average around 46 GW, while structural demand remains significantly below pre-crisis levels.

3. EU steel output contracts in October ahead of restocking in 2024

What's happening? EU benchmark hot-rolled coil steel prices hit a low in October on weaker spot demand, ahead of prospects for stronger restocking demand from year-end. Weaker demand for steel produced in the region was reflected in regional crude steel production levels, trending below the rest of the world.

What's next? EU steel output may gradually recover and start posting year-on-year increases in 2024, after a weak two years. EU production in October saw a 7.14% contraction on a year earlier. This compared with 1.23% growth in the rest of the world, led by expansion in India, South Korea, Turkey and Japan. Higher steel demand may be positive for iron ore and met coal, ferrous scrap. Steel raw materials market participants showed cautious optimism for stronger demand and pricing into 2024 after a weak fourth quarter.

4. US, African crude attract Northeast Asian refiners

What's happening? The Brent/Dubai Exchange of Futures for Swaps, or EFS spread, a key indicator of Brent's premium to the Middle Eastern benchmark, has flipped to negative in recent weeks. Platts assessed the sweet-sour crude benchmark spread at minus 14 cents/b on Nov. 17 and minus 2 cents/b on Nov. 21. The spread last flipped to negative in August and it averaged 99 cents/b in Q3, marking the narrowest quarterly spread since Q4 2020 when it stood at 48 cents/b, S&P Global data showed.

What next? Northeast Asian refiners are looking to take more low-sulfur crude from the US and Africa over the coming trading cycles as a weaker EFS makes various sweet crude grades linked to the European benchmark more economical compared with Dubai-linked high-sulfur crude grades. South Korea imported close to 15 million barrels of US crude in October as refiners actively purchased WTI Midland cargoes in August when the EFS spread fell to as low as minus 19 cents/b. More than 8 million barrels of US crude also reached China in October, marking the highest volume from the North American producer in four months. A VLCC of US crude typically takes around two months to reach Northeast Asia.

5. China raises 2023 fuel oil import quotas

What's happening? China's Ministry of Commerce on Nov. 27 raised the country's 2023 fuel oil import quotas by 3 million mt for non-state-run enterprises to 19.2 million mt, which will allow independent refineries to bring in more barrels as alternative feedstock for the rest of the year. China's independent refineries have significantly ramped up their fuel oil imports in 2023 due to a combination of competitive prices of Russian fuel oil, strong refining margins in the first half of the year and tight crude import quota availability toward the year-end. They have almost used up the 16.2 million mt of fuel oil import quotas as of end-October.

What's next? With the new quotas, refineries can bring in their fuel oil arrivals in November. Around 15 cargoes totaling 15.5 million mt of fuel oil arrived for independent refineries this month, up 123% from 695,000 mt in October, data from S&P Global showed. More than 1 million mt of fuel oil are due to arrive in December, an analyst estimated. Refining sources said the announcement was encouraging as there won't be any disruption of fuel oil feedstock imports amid sufficient quotas when the year-end and new year come. But at the same time, fuel oil prices would be pushed higher if refiners rush to increase their procurement for the barrel by the year-end, market sources said. Russian M100 fuel oil was recently heard offered at a premium of around $75-$80/mt against the Mean of Platts Singapore 380 CST HSFO assessment, up from deals done at around $70/mt in mid-November, sources said.

Reporting and analysis by Ivy Yin, Andreas Franke, Hector Forster, Phil Vahn, Oceana Zhou