EUAs are anticipated to trade largely neutrally this week as they rejected attempts to break lower than 78 euros last week, in spite of the return of EUA auctions. At the time of writing the market is testing 78 euros – which provided strong support over the last few days of trading. Further price losses could be possible if we see a break of that level. Bearish fundamentals could support that analysis – some commentators have pointed out a strong correlation to bearish natural gas prices, while French nuclear is running above 40GW, hydro availablility is good and wind powered generation is running strongly – but a colder spell of weather is forecast this week, which implies some upside risk if heating demand also increases. The status quo would appear to be for relatively mild temperatures for the forseeable future, so colder spells will continue to represent bullish risk. A break of 78 euros would give a bearish outlook, while no break lower might mean the market stays around the 80 euro level given that colder weather but bearish energy market fundamentals.

  • 11.8 million EUAs will be sold at auction, 2.7 million more than last week when there was no auction on Wednesday. 
  • European gas storage sits above 83% as of Friday
  • Political news less relevant than fundamentals this week: the ENVI Parliament meeting saw Fit for 55 pass convincingly. There is nothing else of note planned this week. Neutral 
  • Weather forecast says cold snap is on the way: Central European temperatures are 5-8 degrees celsius above the seasonal average. If relatively mild temperatures look like the status quo this winter, spells of colder weather will represent bullish risk. Balkan countries are already experiencing snow – Bullish
  • Market remains tight as industrial demand remains: gas demand in 2022 was 10.26% lower than the five year average (ICIS figures) – which would suggest curtailed industrial production. However a switch to running on crude oil – by some power generators and some refineries – would add emissions. This continued EUA demand may go some way to explaining why EUAs are finding buying support above 78 euros. Bullish
  • Bearish fundamentals: wind power is running above seasonal averages; hydro availability is good; French nuclear has been running above 43GW. Some correlation with TTF Gas prices has re-emerged – we see a correlation coefficient of 0.63 vs. December’s 0.13, with 0.7 typically representing a strong correlation.
    • In spite of the forecast colder weather, gas is now pricing under 60 euros. This could drag EUAs lower, though a return to fuel switching from coal (one tonne CO2 per MWh) to gas (half a tonne of CO2 per MWh) is regarded as unlikely for 2023 by analysts.
    • Any fuel switch would likely be bullish for gas prices and prompt volatility for EUAs.
    • Nonetheless, we are getting close when looking at front month gas and coal prices – see chart 2.
  • 2026 fuel switch looks possible again: ICIS show that Y+3 power production would be possible now using natural gas fired power plants. This could have an impact amounting to about 10% of EUAs required for power generation in 2026, judging by historical major utility hedging ratios three years in advance. Bearish – but only to a small extent. 
  • UK ETS: UKAs are roughly shadowing EUA price developments. Almost 40% of UK power generation is coming from renewables at the moment. Approximately 6% or 2.6GW of UK demand is being imported – from Belgium, France and the Netherlands. That could imply modest demand for EUAs in continental Europe and therefore no UKA demand corresponding to 40% + 6% of UK electricity.
  • Technicals: MACD, momentum and RSI all suggest that the market may find support. the 100-day moving average is also offering some support – some bearish exhaustion. If the 77 support can be broken, we’d anticipate prices lower than 73 euros – the previous low. A break above 80.50 sends the market into bullish mode, opening the door to 83.50 and then 87 euros – a significant resistance level.

R3: 87.00

R2: 83.50

R1: 80.50

CP: 78.00

S1: 77.00

S2: 75.50

S3: 73.00


Outlook: bearish

  • Indicative EUA Price: €78.90
  • 2022 Average EUA Price: €81.21
  • January Month to date average EUA Price: €80.49

 

Charts

1 – Dec23 EUA price chart 2- Fuel switching front month, 2024, 2025 vs. EUA price – ICIS

Chart shows the level EUAs must reach in order to incentivise switch from coal to gas fired power – note with EUAs around 78 Euros, fuel switching does not yet look possible in near term. 

 

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