In spite of Monday’s price losses, we believe the current high prices are fundamentally supported and further price losses may be limited. A drop to the €80-85 level is possible but shouldn’t be counted on this week. Trend support would be broken with a close under €86.50. In the mid-term there is still bearish potential in the market.

Emissions remain high as coal is favoured over natural gas for electricity generation and demand exceeds supply in the EU ETS on a daily basis. French nuclear capacity remains diminished, keeping generation spreads strong.

Fuel switch emissions reductions ruled out for next three years: EUAs need to move substantially higher as far out as 2025 to encourage fuel switch from coal fired power to natural gas fired power – providing support to EUA prices as emissions reductions at scale remain difficult.

Low hydro levels will encourage fossil fuel burn: southern European hydro levels are at record lows in drought conditions. Coupled with outages to French nuclear capacity and heightened power demand for air conditioning in summer in southern Europe, this could mean additional EUA demand and high EUA prices as fossil fuel power generation is used. Forecasts are for continued dry conditions in southern Europe through May.

Speculator numbers not changing much week on week – few sellers? See chart 3 below – the move higher appears fundamentally justified, so we might also not see much profit taking even at high EUA prices, with speculators largely not involved. A cut to short positions also suggests non-compliance players may be being squeezed out of the market.

RePower EU and ENVI European Parliament talks could prompt volatility, bearish risk: we see potential short-term downside however, with the European Parliament’s discussions on the RePower EU proposals – which could result in added EUA supply over 2023-24, and this week’s European Parliament discussions within the environmental and industrial committees on key fit for 55 proposals may produce volatility as details leak. The Parliament may seek to adjust cuts to EUA supply that were proposed by the Commission last year. The MSR could also be adjusted to make it more likely to add EUAs back into the market. The vote within the environment committee is scheduled for 16/17 May and RePower EU on 18 May.

Natural gas deadline next week, a sharp move higher could send EUA lower: looming is the payment deadline for Russian natural gas supplies, after May 20. If Russia cuts off supplies this could send gas prices higher and means demand destruction potential and potential EUA selling from the energy sector. A sudden move would be required – gas prices are already factoring in fear of a cut off to supplies, which seems to be providing support to EUAs’ move higher.  The EU’s sanctions on Russian oil could also prompt a response  from Russia that might affect gas flows. Given the negative correlation between EUAs and natural gas prices, we could see a buying opportunity as we saw in week 17. Therefore short term bearish risk exists.

2021 TNAC published 15 May: the release of the total number of allowances in circulation for 2021 will set the scene for the Market Stability Reserve in 2022/23. The expectation is that the EUA supply / demand balance will loosen after August, given the rebound in emissions from 2021. This is, however, fairly predictable so a market move based on this seems less likely.

From a macroeconomic perspective, the outlook remains gloomy. France and Germany are registering downturns to industrial production that indicate the toll high commodity prices are taking on heavy industry. Mid term this should be a bearish signal to EUA prices.

Outlook: neutral

  • Indicative EUA Price: €87.50
  • YTD Average EUA Price: €82.89
  • April average EUA Price: €87.57


1 – Dec22 EUA price chart 2 – Front Month fuel switching levels to Friday 6 May: TTF Gas prices must drop convincingly under the yellow line below to suggest emissions reductions via fuel switch are possible.
3: Speculator numbers


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