This week, developments related to weak Russian gas flows and the EU’s response are likely to be the key sources of market movement. Though coal fired power is generating substantial amounts of electricity and adding to EUA demand, there are some bearish possibilities to be aware of as well. We expect EUAs to be supported this week based on strong fundamentals but bearish factors listed below may weigh on EUA prices.

  • Auction volumes this week stand at 11.5 million EUAs, 2.67 million more EUAs than last week.
  • The European Council’s position on Fit for 55 is likely to be priced into the market. Trilogue discussions between Commission, Parliament and Council could come as early as July. Please find a table on the positions of each branch of the EU here.
  • High emissions, strong energy complex to support EUAs: with sustained high emissions from the energy sector (see S&P Global on poor hydro, nuclear generation outstripping renewable capacity), EUA prices should remain supported above 79 euros, after last week the market broke higher through previous resistance around 86 Euros. German lignite and coal fired power profitability improved last week while gas fired power profits lagged by comparison – see chart 2 below.
  • EUAs unlikely to surge materially higher: it looks difficult for EUAs to sustain prices over 90 euros without significantly more EUA demand appearing.
  • Bearish potential: 8 July brings the German Bundesrat’s vote on the second stage of its gas emergency plan – though additional coal burn is known and has been processed by the market,
    • Clarity on the length by which the life-span of these coal plants is to be extended (anything over 6 months would imply coal burn after phaseout deadlines for some plants) could prompt a market move,
    • Details from the Bundesrat on efforts to cut industrial natural gas consumption could affect EUA demand.
    • Chart 3 below from ICIS suggests that German gas demand has dropped – with gas fired power output in June similar year on year, this suggests industrial demand destruction may be playing a role.
    • Only Turk Stream is running normally, and Nord Stream is at 40% capacity. Germany is planning for a full cut-off to gas flows on the assumption the Russians are using this as a geopolitical weapon.
  • Bearish potential: utilities feel the strain of reduced gas flows – those utilities are being forced to look further afield than Russia to secure their gas volumes, at higher prices. They are unable to pass costs onto end users. Uniper is reporting sharply cut earnings compared with forecasts. ‘Stabilisation measures’ are being discussed by Uniper with the German government. If in search of quick cash, those utilities may choose to sell EUA hedges – we are looking to see how other utilities are affected.
  • Eurozone inflation has risen to 8.6% in June. Monetary policy measures could introduce deflationary pressure over summer.

Outlook: neutral bullish

  • Indicative EUA Price: €84.80

  • YTD Average EUA Price: €83.47

  • June average EUA price: €84.18

  • MTD average EUA Price: €86.18

Charts

1 – Dec22 EUA price chart 2 – Power generation profitability – note larger jump higher for coal, lignite vs. gas.
3 – German gas demand – ICIS

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