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Commodity Tracker: 5 charts to watch this week

Natural gas market dynamics are in the sights of S&P Global Platts editors this week, as European prices soar on a variety of factors. Plus, key trends in emissions, US gas, aluminum and coal.

1. LNG tightness, lack of Ukraine transit bookings send TTF prices soaring

TTF vs Henry Hub natural gas price

What's happening? TTF prices have risen dramatically over recent months to levels not seen since 2008, firstly on a prolonged winter and strong demand that have driven storage stocks to the bottom of the historic range, and more recently on tightening pipeline and LNG supply. In addition, the market is now struggling to price gas out of the power sector as the coal-switching price rallies to new record highs.

What's next? S&P Global Platts Analytics' view is that currently TTF and JKM prices above $11/MMBtu and $13/MMBtu respectively are not justified. Risks remain that could drive Platts Analytics' forecast for TTF and JKM even higher, but to surpass levels already priced in by the market we would need to see multiple major bullish factors align, including Gazprom's continued aversion to booking Ukrainian interruptible capacity. Russian flows in July will drop considerably on maintenance works at gas entry routes Yamal and Nord Stream, scheduled July 6-10 and July 13-23, cutting 78 million cu m/d and 158 million cu m/d respectively based on current flows.

Infographic: TTF rally amid record CO2 prices

  1. 2. EU CO2 hits fresh high after 2030 emission reduction plans leaked

EU carbon emission price

What's happening? EU carbon prices rallied to an all-time high of Eur58.64/mt July 1, after leaked documents showed more detail around the European Commission's legislative proposals to reform the market, due on July 14. As expected, the draft documents showed the EC plans to tighten the annual carbon caps to align with the bloc's new 55% emissions reduction target for 2030 within a year of the new law taking effect.

What's next? More volatility is likely as the market digests the implications of the expected reforms ahead of the EC's July 14 proposals. The leaked draft also included plans to expand the EU Emissions Trading System to include shipping from 2023 in a 3-year phased-in approach and to create a new carbon market for CO2 emissions from road transport and buildings.

Infographic: Shipping sector weighs impact of EU ETS

  1. 3. Forecast US heatwave could push Henry Hub beyond latest record

NYMEX Henry Hub price

What's happening? A late-June rally in the US natural gas market has lifted the NYMEX Henry Hub prompt-month futures contract some 15% recently to over $3.60/MMBtu, marking its highest in 30 months. The summer rally was initially spurred by a heat wave that lifted temperatures into the mid-90s in many locations, stoking gas-fired cooling demand. According to traders and brokers active in the futures markets, the rally was further exaggerated by premature short selling, which resulted in more buying required to cover previous sales of the expiring July contract.

What's next? On June 30, the US National Weather Service issued a revised month-ahead outlook for July, warning of a 60% to 70% risk for above-average temperatures in parts of the Rocky Mountains, the Pacific Northwest and many of the heavily-populated areas of New England. Historically, heat waves in July and August are typically the most severe of the summer season. As extreme weather and corresponding cooling demand push US reserve generating capacity to its limit, gas-fired power burn is becoming increasingly price inelastic — pointing to the possibility that Henry Hub gas prices will move higher still, potentially surpassing $4/MMBtu at some point this summer.

4. Russia's aluminum export duty leads to price surge in Europe

Platts European aluminum premiums

What's happening? Aluminum spot premiums over the LME cash price surged in Europe through the week ending July 2 as the market reacted to the announcement by the Russian government of an export tax on a suite of ferrous and non-ferrous metals from Aug. 1. Exporters of Russian aluminum will have to pay a specific component of $254/mt on top of a 15% base rate. As Russia is a key source of duty-unpaid aluminum in Europe, the new tax is expected to vastly increase the cost of replacement duty-unpaid units on the continent. Imports from other regions also remain uneconomic due to high freight rates and long queues at warehouses in Asia. Before the announcement, duty-unpaid premiums had already increased by 90.91% in 2021 due to supply tightness.

What's next? Premiums are expected to strengthen further in Europe and to rise in other global regions to a lesser extent. Some in the market believe that producers may look to recover costs by producing fewer ingots and increasing the production of higher revenue generating, value-added products like billet. This would further exacerbate the tightness of supply within the European duty-unpaid ingot market.

  1. 5. Glencore doubles down on coal, while others look to exit

Global coal demand

What's happening? On June 28, Glencore announced it will buy out its two partners' interest in the Cerrejón coal mine in Colombia, one of the world's largest open-pit thermal coal mines. The sellers, Anglo American and BHP, along with a host of other fossil fuel producers, have targeted emissions reductions through divestment. In contrast, Glencore has looked to acquire productive assets in the short term, while pledging to a "responsible managed decline" of its coal portfolio over the long term.

What's next? While major fossil fuel producers have been under pressure to reduce emissions, it is important to note that so long as there are buyers of fossil-fuel producing assets from companies looking to get them off their books, the divestment strategy has decided limitations in reducing overall emissions. To achieve the more ambitious global emissions reduction targets (>2 Degree, >1.5 Degree, net-zero, etc.), fossil fuel-producing assets will likely need to be retired before their useful lives are over, which will be more costly than selling them to another entity. S&P Global Platts Analytics expects demand for coal, specifically, will remain fairly robust over the next several years as demand declines in industrialized nations, and their demand for imports from companies like Glencore will be offset by growth in developing nations.

Reporting and analysis by Ornela Figurinaite, James Huckstepp, Valentina Bonetti, Samer Mosis, Luke Cottell, Frank Watson, J Robinson, William Healy and Dan Klein