Interest in the EU ETS has dropped markedly compared with trading in previous months. EUAs have spent the last three weeks trading between support around 76.75 euros and resistance around 82 euros. A few attempts at breaking lower have lacked conviction. This week, heading into Easter, we expect continued subdued trading, with the EUA price supported by energy sector buying. Friday is an exchange holiday. There are, however, potential factors that could prompt a more substantial price drop whether natural gas prices rise or fall in coming weeks, discussed below. Factors to look out for this week include: 

  • Utility demand is likely to keep EUAs supported: ICE commitment of traders data shows speculators are not adding to their long positions in any great numbers, after having liquidated a large portion of holdings in the early-May price drop. Therefore it seems most of the demand is coming from the energy sector. Low wind levels on Monday are keeping fossil fuels in the mix for power generation in Germany.
  • Easter: a short week might keep traders away from the market, though we may see some pent up demand from Easter being hedged next week.
  • Speculators are not buying EUAs: speculators are not buying in following the major price drop at the start of March. EUAs at least are not likely to move back to 90 euros without speculator involvement. Equally, however, speculators are usually major sellers at price drops, as we saw in 2020 due to covid and in 2022, so there may be less sellers to drive prices to recent lows.

Bearish possibilities:

  • Gas prices are elevated on Russia risk but fundamentals start to look bearish, could fuel switching come back? Gas continues to flow from Russia, while LNG imports are also helping to fill storage and temperatures are mild. TTF Gas, like the EU ETS, has shown little volatility recently and prices remain high as the market perceives risk of Russia cutting off supplies – so gas prices could be due a breakout, possibly a drop that could prompt volatility in EUAs.
  • Payments for gas in rubles – will this present problems? In theory this demand was resolved when Gazprombank stated it would facilitate currency conversions from dollars and euros for gas buyers. Payments for gas deliveries are likely due around the end of this week or start of next week so it remains to be seen if this requirement will cause problems that might send gas prices higher, or successful payments alleviate some of the fear in the market.
  • Russian coal embargo confirmed for August, helps case for fuel switching emissions cuts: API2 coal prices are up, leaving gas behind to trade above 300 dollars. Japan too will cease imports of Russian coal, thereby tightening the market for non-Russian coal supplies more. Our estimates suggest a front month coal price of 361 dollars if natural gas prices stay the same, could allow some fuel switching from coal to gas fired power. See chart 3 below for a view of how close we are to fuel switching.
  • Demand destruction, margin calls continue to present risk: industry is dealing with high costs and some are warning they are near breaking point. Though industry is a relatively small proportion of European emissions, shutdowns would cut both power demand and EUA demand and send a bearish signal if large numbers of factories had to stop production. Equally a sudden move higher for natural gas could prompt a similar situation to the last price drop, with offloading of EUA positions by utilities.
  • Further sanctions, chance of recession? The German Vice Chancellor Habeck is talking about reactivating coal and lignite power production – which is already turned on, and favoured over gas. The larger message here for those interested in EUA prices might not be an increase to EUA demand from coal and lignite as these energy sources are already heavily used, but rather, risks of shocks to European economies. 
  • Narrowing Bollinger Bands, technical support at 76.75 euros still holding: narrow Bollinger Bands are suggestive of a price breakout. Note from chart 1 below how volatility in the market has dropped over the past three weeks. 

Outlook: neutral

  • Indicative EUA Price: €77.90
  • YTD Average EUA Price: €82.77
  • Month to date average EUA Price: €78.71


1 – Dec22 EUA price chart 2 – German power generation sources – Monday 11/4/22 3. Fuel switching levels for natural gas

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