This week’s EU ETS outlook is neutral to bullish, with some potential for a correction. EUAs are likely to keep trading near €80 as options hedging dominates trading – and with significant open interest for options at €100, it is impossible to rule out further price gains. The December 2021 options contract expires on 15 December. One thing to note in the bullet points below is a substantial change in options holdings week on week that suggests the bull run may slow here. Fundamentals, however, are supportive with continued strong clean dark spreads maintaining buying demand. The market is short on a daily basis and seems to be responding to Europe drawing on gas storage reserves and the suspension of Nord Stream 2’s approval process. If EUAs cannot find emissions reductions from somewhere in the absence of fuel switching from coal to gas, EUAs will need to rise to the price at which gas power becomes favoured over coal – around 150 euros per tonne of CO2. With that said, if prices do increase, abatement from other sources and industrial shutdowns are likely to reduce demand and limit price gains. The sheer speed of the price increase suggests sentiment is playing into current EUA prices and from a technical perspective and with covid risk affecting other markets, a correction may be due. If there is one, those options traders we mentioned will fight to keep prices near their strike price.

EU ETS Outlook: neutral – bullish

           YTD Average Price: €51.58   Indicative EUA Price: €79.90

  • Wintery weather and coal fired power to keep EUA demand up: North Western Europe will be hit with more storm conditions from Tuesday this week. Strong wind levels could have some bearish impact, but the market seems driven more by sentiment around the wider energy crisis, a cold winter in general and options trading – so from a fundamental perspective the market should remain supported. 
  • Options trading volume strong at 75, 80, 100 Euros – prices likely to stick to one of those levels: the market may stay around these key levels – traders are unlikely to let it drop substantially away from their strike prices. Nonetheless, as the chart below shows, €75 and €80 call options have been substantially reduced since the market hit those levels – so options hedging activity may be less than last week. 

  • Market is short, where emissions abatement isn’t possible, market must seek higher prices: ICIS estimate the market is short by 150 million tonnes of CO2 in 2021. Previously some of that abatement had been factored in from 2022 fuel switching from coal to gas as Nord Stream 2 would soothe the market – that allowed the market to settle at €60. 
  • Low gas flows force EUAs to seek new abatement price: if Nord Stream 2 doesn’t come online soon – and it seems the market had expected it to start up early next year or even (unrealistically) over winter, the market needs to find emissions reductions from somewhere, or rise to a price at which those holding EUA surpluses are willing to sell. One possible source would be fuel switching from coal to gas – but that would need an EUA price of around €150. 
  • 100, 150 euros unlikely given demand destruction potential, other abatement sources: Europe has begun to use gas reserves. Bloomberg report that if gas reserves start to run out early next year, industrial gas users may be asked to shut down in favour of household heating – thereby cutting industrial power demand, which makes up about 1/3rd of total EU power demand, natural gas demand, and EUA demand. 
  • Covid and overbought technicals suggest a correction, but has one already happened? Even as EUAs powered higher, total long investment fund positions took a dip according to the latest ICE Commitment of Traders data, which was released on 26 November. Absent from last week was the conspicuous price increases in the afternoon that we saw the week starting 22 November – suggesting American market involvement. That might have been some of the reduction of risk on the part of speculative market participants, driven quickly higher by compliance buyers and options traders – though it remains to be seen if the market will take a further drop as it remains solidly overbought on technical analysis.
  • Technical analysis: the Relative Strength Indicator (RSI) still shows an overbought reading on the daily and weekly chart views. €80.42 is the technical target, above which we may have a vacuum which could send us towards €100. To the downside, €78.23 is the nearest resistance level of note. Clive Lambert of Futures Techs writes: “[Prices] left no vacuums below on Friday’s rise, which goes against the ‘frothy’ idea… usually when things are ‘going gangbusters’, vacuums and gaps start to show up.” – indicating that he believes the price increase is sustainable and further upside may come. 

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See also our UK ETS market update here