Commodity Tracker: 6 charts to watch this week

Hopes are high that key concerns around the rules and technical aspects of emissions trading under Article 6.4 of the Paris Agreement will be resolved during the ongoing UN Climate Change Conference, or COP28, in Dubai. In oil, the spotlight is on the decision of OPEC+ members to implement voluntary production cuts in early-2024. Russian wheat production, US natural gas output and the possible extension of the EU's gas market correction mechanism are also in focus.

1. Crunch time for Article 6.4 carbon market negotiations at COP28

What's happening? In the run up to the UN Climate Conference in Dubai, the body responsible for determining guidelines for a global carbon market under Article 6.4 of the Paris Agreement agreed on a framework on project methodologies and carbon removals. The Article 6.4 supervisory body's recommendations will now be presented at COP28 in Dubai for adoption by the CMA of the Paris Agreement. The CMA oversees the implementation of the Paris Agreement and takes decisions to promote its implementation. It meets annually during the same period as the COP.

What's next? If a text is endorsed by countries in Dubai, the UN can proceed to register projects under Article 6.4 in 2024 and newly-verified credits can enter the market. The clause specifically allows a company in one country to reduce emissions domestically and have those reductions credited so that it can sell them to a different company in another country. This will support both national net-zero commitments and, indirectly, the voluntary carbon market, which will benefit from the market structures and integrity boost Article 6 will bring. Developers are keen to get their credits verified in order to reverse the decline in credit prices seen this year.

2. Spotlight on compliance after OPEC+ announces Q1 2024 quotas...

What's happening? Some OPEC+ members agreed Nov. 30 to implement a total of 2.2 million b/d in voluntary cuts for the first quarter of 2024 in a bid to prop up oil prices. The move comes after days of tense negotiations, which led to the OPEC+ ministerial meeting being postponed by four days. A major source of tension in the talks was quotas for African producers in the group. Sub-Saharan members, including Angola, Nigeria, Republic of Congo and Equatorial Guinea, have produced under quota in recent months and their targets for 2024 have been slashed. The market is so far unconvinced that the cuts will be enough to outweigh demand concerns fueled by weak global economic data and growing non-OPEC production.

What's next? Each country announcing their own cuts individually has been interpreted by some market watchers as a sign that further tension within the group may lie ahead. All eyes will now be on compliance, as some producers that are implementing voluntary cuts have a patchy record and may struggle to meet their commitments. The pledges also come after a recent uptick in the group's output. OPEC+ production was up 180,000 b/d on month in October to 42.71 million b/d according to the latest Platts survey by S&P Global Commodity Insights.

3. ... while Asian refiners shrug off OPEC+ cuts

What's happening? Asian refiners are expected to remain unaffected by OPEC and its alliance's commitments to limit crude output and export in Q1 2024, as major Middle Eastern suppliers continue to prioritize East Asian customers and provide stable term contractual volumes. Suppliers like Saudi Aramco have been fully meeting most Asian refiners' nomination. For instance, South Korea had imported 543.62 million barrels of Middle Eastern crude over January to September, up 3.5% compared to the same period last year.

What's next? Apart from Middle Eastern sources, refiners in South Korea, Japan, Thailand and Taiwan can also turn to US imports as its light sweet crude are being offered into Asia at a favorable price amid a narrow Brent-Dubai price spread. Market participants anticipate the US could export more light sweet crude following the lifting of sanctions on Venezuelan oil.

4. Russian wheat exports expected to hit all-time high following bumper crop

What's happening? Russia is expected to export 50 million mt of wheat in 2023-24, according to the US Department of Agriculture. This would be Russia's highest export figure of all time, maintaining its position as the leading wheat exporter in the world. This follows another bumper crop, with the country expected to produce 90 million mt of wheat in 2023-24, the second highest yield on record after the 2022-23 estimate of 92 million mt. Amid the pressure, S&P Global's Grains & Feeds Price Index was recorded at 96.9 points in October, down 13% from January.

What's next? Strong global wheat exports are likely to continue, with Ukraine now utilizing a newly established temporary trade corridor with the EU, in addition to Russia's bumper crop. This higher supply could offset lower expected yields from Australia following unfavorable weather conditions and continue creating downward pressure on global wheat prices.

5. Strong US natural gas production keeps market well supplied

What's happening? US Lower-48 natural gas production averaged a record 102.5 Bcf/d in October and then surpassed that record in November to reach 105.1 Bcf/d. Production rose above 106 Bcf/d over Nov. 23-25. Increases have come from the leading producing basins: Permian in West Texas and New Mexico and Marcellus Shale in Appalachia. The Permian has seen additional gas pipeline takeaway capacity come online. Strong production has kept the market well supplied and pressured US cash and futures prices. Henry Hub cash prices averaged $2.73/MMBtu in November, and the January futures contract has fallen below $3/MMBtu. Production has risen despite rig counts falling to 699 by Nov. 22 from 866 at the start of the year.

What's next? November could be the high point for production this winter. S&P Global forecasts production will decline in December and early 2024. Indeed, production has already fallen by 1.5 Bcf/d from the mid-November peak. Later in the year, the 2 Bcf/d Mountain Valley Pipeline should increase Marcellus takeaway capacity in the second quarter, and the 2.5 Bcf/d Matterhorn will boost supply options from the Permian in the fourth quarter.

6. EC proposes to extend emergency energy market measures

What's happening? The European Commission has proposed to extend by 12 months a number of emergency measures introduced in 2022 in response to the energy crisis provoked by Russia's invasion of Ukraine, including the gas market correction mechanism. The mechanism put in place a TTF price cap of Eur180/MWh, which was later extended to other European gas hubs.

What's next? The cap, which came into effect on Feb. 1, is valid until February 2024. If the extension is approved, the price cap -- which was introduced after European gas prices spiked in the summer of 2022 -- will remain in place until February 2025. The EC said that while the situation on the European energy market was more secure than 12 months ago, it was proposing the extensions in order to "further enhance security of gas supply and strengthen market resilience."

Reporting and analysis by Henry Edwardes-Evans, Rosemary Griffin, Rong Wei Neo, Lebogang Moichella, Killian Staines, Stuart Elliot