The current EUA price increase looks like it is being driven by speculative influences. The market is trading technically, with low volumes traded and strong options trading volume in the last week. Inflation may be pushing investors into the EU ETS – as well as new exchange traded funds that have been starting up. The market, therefore, could easily hit a new all time high, trading only one euro beneath the previous high at €65.77, but just as easily drop back to the €60 level. A few more factors to consider this week: COP26 concluded positively, giving confidence to buyers, while the European Securities and Markets Authority will report on EU ETS trading today, which will help give the market direction. From a fundamental perspective, low natural gas flows into Europe and cooling temperatures are keeping EUA prices supported and potentially encouraging bullish speculators – even if market fundamentals are not so bullish that they should send EUAs materially higher. Though momentum is for higher EUA prices, the lack of substantial change to fundamentals and thin trading volumes mean EUAs should be drawn back to the €60 level sooner or later.

EU ETS Outlook: bullish – but correction looks possible

           YTD Average Price: €50.14   Indicative EUA Price: €64.76

  • Speculators, heavy options trading sends EUAs higher: last week saw 7 million EUA call options traded (one option per EUA) at a €70 strike price, with hedging activity from those options sellers most likely influencing the market. Increasing interest rates may have something to do with this – we note a slight increase in investment fund holdings as of 5 November data from the most recent ICE Commitment of Traders report.
  • Price gains on thin volumes of trading make market prone to large moves both up and down: on the chart above note recent traded volumes have been low, in spite of strong green candles pulling prices within touching distance of the all time high. Technical indicators might give a clue regarding profit taking.
  • Weak gas flows, low wind levels keep gas prices supported, fundamental EUA demand to remain strong through winter: gas is trading around the €80 level as no substantial increase to gas supplies has been forthcoming. Coal power generation and related EUA demand is locked in for winter, so EUAs should continue trading near €60. Belarus’s threat to stop gas flows from Russia adds more upside risk for TTF gas, though this should translate only minimally to EUAs.
  • Winter presents moderate additional upside risk: winter is expected to bring below average temperatures and mostly calm weather, which isn’t good news for wind power generation. Added electricity and heating demand across Europe will add some EUA demand, though utilities will have hedged a good amount of this EUA requirement already.
  • European Securities and Markets Authority report on potential abuse in energy markets: any finding that speculator involvement is adversely impacting European energy prices could be bearish for the market – otherwise business continues as usual.
  • Technical analysis: MACD and RSI indicators suggest momentum is with the bulls and there is still some room before the market reads overbought – which could be a prompt for profit taking. A close above €64.10 today suggests the bull run is not over. After that, the target is €65.77. We need to break support at €61.53 to look convincingly bearish again.

EUA Long position

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See also our UK ETS update here