This week brings bearish headwinds in in the form of a milder weather forecast translating into lower power prices, resumption of EUA auctions and potential interest rate increases that are affecting wider markets already – but one potentially bullish source of risk. Russian and US diplomats will meet in Geneva for talks on a settlement to avoid an invasion in Ukraine. One of Russia’s demands is for Ukraine to never be a member of NATO. If Russia insists that NATO cannot expand ever again, we will know that Moscow is preparing for war in Ukraine, as this is a red line for the west. Such an outcome could influence future gas supply from Russia given Nord Stream 2’s uncertain status, and potentially send EUA prices higher as emissions reductions through fuel switching from coal to gas are likely ruled out to the end of 2023 or beyond. A positive outcome in Geneva, however, could play into those bearish headwinds and present relatively better prices for buyers.

Contact us to discuss your hedging requirements for 2022 and minimise this bullish risk.

EU ETS Outlook: bearish – unless Ukraine talks fail

  • Mild weather: Western and North Western Europe seems to be warming up, weighing on German power prices and therefore EUAs. German power lost 8% in trading on Monday morning, to around 230 euros per MWh. Reduced demand for power and heating can translate into EUAs. With power propped up by winter demand and high gas prices, we don’t yet see fuel switching coming back into play however, so losses should be limited – EUA prices in the €60s look unlikely.
  • Resumption of EUA auctions: Monday’s auction sold at a hefty discount – €82.71 vs. a spot EUA price at €83.12 at 11 a.m. We anticipate more normal volumes of trading from now as new supply of EUAs returns to the market, though industry is unlikely to want to get involved as long as prices remain around 80 euros. With risk stemming from Ukraine, compliance buyers may find themselves forced to buy anyway unless they use their free allowances – but with substantial long term risk, a decision on borrowing EUAs forward would need to be very carefully considered.
  • Mooted US interest rate increase turns wider markets bearish: the US Federal Reserve has given hints interest rates may need to be increased soon. The European Central Bank looks set to maintain low interest rates. Given American interest in this market however, which sometimes shows up as prices jump higher in the European afternoon, this represents a potential bearish influence on the market. As yet the most recent ICE commitment of traders data only relates to the week before Christmas, so it’s hard to verify if American money is leaving the market as yet.
  • Bullish risk – make or break week for Russia-US talks on Ukraine, could affect long term gas price: this week looks set to be a pivotal one in the Russia-Ukraine crisis. Europe wants to keep Nord Stream 2 on the table in terms of bargaining chips. Part of Russia’s demands is for NATO membership to be ruled out for Ukraine – a red line for the west. We should find out this week if Russia is really coming to the negotiating table, or the demands were calculated to be rejected. ICIS have previously noted that war in Ukraine could mean years of high energy prices.
  • Gains along the TTF Forward curve: Below the forward curve for natural gas is shown, along with indicative fuel switching prices. EUAs have been squeezed to current levels by inability to reduce emissions in the short term, while the Q1 2023 TTF Gas contract started trading above the fuel switching level in December – no doubt the market anticipates the worst for Ukraine. The market should be chasing the fuel switch price for EUAs, which sits above 200 euros, so worsening long term prospects could send EUAs higher. Ulf Ek, managing director at London-based hedge fund Northlander Commodity Advisors, says EUAs could move above €100 this winter and then rising to €140-160 later this year. ICIS have previously noted that war in Ukraine could mean years of high energy prices.

  • Risk of conflict priced into Dec22 EUA contract? Analysts broadly have a pessimistic view of the chances of avoiding war in Ukraine so gains to TTF Gas contracts for delivery in 2023 may already have a good amount of risk premium priced in. EUAs have been squeezed higher to the €75-85 range as further dated emissions reductions are ruled out. We do note gains on the Summer 2023 TTF Gas contract towards the fuel switch price, however, and with the EU ETS short on a daily basis, further gains cannot be ruled out.
  • Technical analysis: €83.09 represents fibonacci support and saw EUAs hold there for much of Monday afternoon. A convincing break below could look bearish after last Wednesday/Thursday saw a Harami formation – suggesting a reversal to the bullish trend. Three days of losses do give a more bearish outlook. To the downside, support at approximately €73.75 could be a target for buyers.

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See also our EU ETS market update here