Please find below our EU ETS weekly analysis for the week starting 11/07/2022.

EUAs are encountering strong support around the €83 level, which represents trend support and is shown in chart 1. Strong coal burn represents upside risk and should help to keep the market supported. A zone of high pressure weather is moving in, meaning hot weather, low wind levels and low rain levels – bad for renewable energy.

On the other hand, like last week the geopolitical and macroeconomic situation represents downside risk as the threat of further cuts to natural gas supplies could impact industrial productivity. Nord Stream 1 is down for 10 days starting today for maintenance, sending Russian gas flows to new lows. The inverse relationship between TTF Gas prices and EUAs remains. REPower EU’s release of 250 million EUAs from the MSR & restrictions on market access for non compliance entities also remain on the table.

Under such stressed market conditions it may be difficult for the EUA price to maintain any gains, and a break of the zone of support around 83 could send prices lower. The 83 level is proving difficult to break however.

  • 8.83 million EUAs will be sold this week at auction, 2.67 million less than last week.
  • Bullish – coal burn remains strong. Coal and lignite power generation profitability is increasing dramatically – lignite hit a record clean brown spread of €257.11 last Thursday. The German Bundesrat has approved use of reserve coal, lignite and oil fired power plants to shield from cuts to Russian gas flows from July, out to 2024 and potentially beyond. 2.6 GW of that capacity was due for retirement in 2022-23 so represents additional EUA demand. See chart 4.
  • Bullish – high pressure weather moves in as shown in fig. 3, reducing wind levels, rain and sending temperatures in northern Europe higher. Fossil fuels will have to fill the gap left by low hydro / wind levels.
  • Bearish – Nord Stream 1 maintenance begins: previously gas had been rerouted through other pipelines – that doesn’t look so likely this time based on nominations by Gazprom for other pipelines. See chart 2. Flows should resume in 10 days but there are no guarantees so gas prices are looking bullish. Carbon’s inverse relationship with gas remains – higher gas prices mean stress for the energy and industrial sectors so this could be the key source of downside risk.
  • Bearish – emergency measures to handle a gas cut-off to be agreed mid-July: The European Commission is to present a proposal regarding preparedness for winter on 20 July.
  • EU Trilogue discussions on Fit for 55: for now political developments should have only a muted market impact. The discussions between Council, Commission and Parliament are aimed for either mid-July or September.
  • Macroeconomic outlook: further rate hikes are possible as inflation continues to increase. A 0.25% interest rate increase is expected for 21 July, and more could come.
  • Support & Resistance levels: On the daily chart the 100day- Moving Average currently lies at €82.20, while the 200day-MA lies at €78.84. We see plenty of trading at the 82-83 level, with support around €83, then €82.24, which is close to the 100day-MA, while there should be major support at €79. To the upside, we see resistance at €83.90, while the next resistance levels lie at €84.33 and around €85.50.  The overall moderately bearish trend since 17 May suggests further price losses may be on the way.

Outlook: neutral bullish

  • Indicative EUA Price: €84.15

  • YTD Average EUA Price: €83.48

  • MTD average EUA Price: €84.14

Charts

1 – Dec22 EUA price chart 2 – natural gas flows from Russia
3 – high pressure zone – click the image for animation. From MetDesk 4 – Clean Spreads – ICIS data

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