We have a neutral outlook this week in spite of the recent bull run. If Monday closes above the opening price of 75.96, that will be five successive days of price increases, so momentum is with the bulls. Look to the options expiry on 23 March which may keep EUAs attracted to the €80 level, while compliance buying ahead of the 30 April deadline, with coal firmly at the centre of current power generation, could keep EUA prices strong. On the other hand, high energy prices are impacting some major emitters, who may not necessarily be buying EUAs at the moment – which might be shown in low volumes of trading of late. Europe’s uncertain economic outlook with a war nearby will likely also have an impact, so following the progress of negotiations there may be instructive. These factors could represent downside risk – the bull-run could stall here. 

  • Bullish momentum: EUAs have posted five consecutive days of gains, albeit on thin volumes of trading. The move through the 38.2% Fibonacci retracement level at €70.48 sent EUAs back into bullish mode from a technical perspective.
  • Speculator influence keeps EU ETS in line with wider markets: speculators may have prompted much of the large price drop and subsequent recovery, as ICE commitment of traders data suggests (see chart 2).
  • Options expiry to lend support to EUAs at €80? There are significant numbers of call options held at an €80 strike price set to expire in a couple of weeks, which could keep EUAs trading around the €80 level. March options expire on the 23rd. There are approximately 8350 call options held at an €80 strike and 6200 at a €90 strike, with each option or ‘lot’ corresponding to 1000 EUAs.
  • Low traded volumes has meant volatility and heightens potential for a correction – if recent volumes of trading are indicative of what we will see this week, it wouldn’t take much trading to send EUAs a euro or two lower or higher.
  • Cash-strapped utilities may not be buying EUAs: Uniper required extra funding for January and another unnamed German company is apparently looking for funding to improve their cashflow situation, so may not be buying EUAs at present.
  • Economic uncertainty means downside risk: an unclear economic outlook for the EU given the war on its borders and evidently no great interest in buying EUAs given last week’s low volumes, means there is risk of a correction, and certainly of volatility. With gas markets around the world looking tight, demand destruction and volatility over the coming months could hit the EUA market.
  • Some buyers ready to buy for 2022 compliance – there only a month and a half until the compliance deadline. The utility CE Oltenia in Romania will receive around €850 million to use for EU ETS compliance.
  • Coal burn locked in: gas prices have calmed as fears of an imminent cutoff to natural gas supplies have receded, but fuel switching remains impossible out to the end of 2023 so any future price drops should be enthusiastically bought.
  • Fit for 55 now a matter of energy security: rather than intervene and weaken climate law, the EU looks set to make a charge to net-zero a key element of it’s energy security.

Outlook: bullish

  • Indicative EUA Price: €78.82
  • YTD Average EUA Price: €84.46
  • Month to date Average EUA Price: €69.18

Charts

1 – Dec22 EUA price chart 2 – ICE Commitment of Traders – Investment Fund Total Long Positions as of 4 March 3 – Fuel Switching levels

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