This week we have identified some bearish factors in wider energy markets which could prompt slightly better prices for EUA buyers, but these could disappear quickly, so have an overall bullish outlook amidst the fraught geopolitical situation near the EU’s borders, start of compliance season, and resurgent speculator interest. Looking at bearish factors, we note an uptick in the coal price which has slightly changed the fuel switching equation along the forward curve, and increased EUA auction volumes after technical issues caused the cancellation of an auction last week. Meanwhile we’ve just hit overbought territory on the technical RSI indicator so may be due a correction. This could be short-lived however. Ultimately the market is short and starved of ways to reliably reduce emissions – and market participants know this.

EU ETS Outlook: bullish 

Indicative EUA Price: €96.12   YTD Average EUA Price: €86.57

Gas contracts out to 2024 are moving higher, but gains for coal prices are pushing the fuel switching level higher, allowing continued use of gas fired power in the second half of 2023. Last week that had looked impossible and we saw gains along the forward curve for gas come as EUAs hit new highs. Likelihood still seems to be of less and less fuel switch potential going forward.

Slight coal price increase looks moderately bearish for the EU ETS, at least temporarily making fuel switching in 2023 viable. Russian coal imports have grown as Russian gas flows remain limited. The EU’s coal imports rose by 55.8% in January versus a year ago, to 10.8 million tonnes – of which Russia supplied 43.2%. Note below the increase in coal price has outstripped the gas price increase and (just about) made fuel switching viable again for a 49.13% efficient gas plant vs. a 36% efficient coal plant in summer 2023.

Long-term gas supplies could be threatened if Russia launches an invasion of Ukraine – some commentators think this could happen later this month. An invasion would be bullish for EUAs. War would also affect Nord Stream 2, quite possibly resulting in it’s cancellation.

Outside chance that cutoff from Russian commodities could bring back some fuel switch potential on forward curve It remains to be seen what an invasion of Ukraine would do to coal prices compared to gas prices. Our models suggest that a price increase for coal could make fuel switching more possible in 2023 and 2024 if gas prices do not rise at the same rate. The USA is contacting potential sellers of LNG to acquire more supply for Europe, though US supplies are estimated to compensate for only approximately 15% of Russian gas supply so the scenario of coal price gains outstripping gas price gains might be relatively unlikely.

We see little interest from industry in EUAs at these prices – speculators and utilities seem to be driving demand. Some demand destruction could result from high energy prices, but likely not enough to affect the market. Therefore utilities and funds seem to be driving EUA prices. The most recent ICE Commitment of Traders report from 31 January shows a sharp uptick in investment fund long positions.

Emissions are rising when they should be dropping: Andurand Capital Management argue that French nuclear outages, German nuclear phaseouts and the energy crisis are sending European emissions the wrong way. Combined with an ever shrinking market balance, EUA prices could increase further in 2022.

Compliance season: typically EUA prices don’t take a large jump higher in the lead up to April’s compliance deadline, but those putting off buying in hopes of lower prices may be forced to come to market in the next weeks. The Romanian state-owned utility CE Oltenia has been granted €2.66 billion for restructuring – which may be used to finance EUA purchases between now and April.

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