This week we have a neutral outlook. There is some potential for price gains on news last week of reduced French nuclear capacity through 2022, forecast colder weather later in the month, disruptions to natural gas flows from Norway and the continued risk of war in Ukraine, which could disrupt gas flows from Russia for years. Nonetheless, improved renewable generation week on week in Germany, continued mild weather for now, relatively bearish wider markets, the potential for tightened global monetary policy and forecast stagnant growth in European energy markets forecast by the IEA should weigh on the market. Looking at gas prices and possible war in Ukraine, so far there is no signal of a substantial price increase on the Q3 2023 TTF Gas contract that we’re looking to for some hint that the market thinks gas supplies could be disrupted long term. The latest ICE Commitment of Traders data from 07/01/22 shows little change in investor long positions week on week – there isn’t much interest in EUAs at present it would seem. Compliance buyers look more interested at prices under 80 Euros even given the upside risk that a Ukraine invasion may entail. Trading in the 80s of Euros may already be on the back of bullish sentiment rather than true fundamentals. It seems we may remain in waiting mode as far as any major market moves go.
Below we add some detail to the above points and also discuss potential for EUA demand destruction coming from developments in the gas market.
EU ETS Outlook: neutral
Indicative EUA Price: €80.50 YTD Average EUA Price: €83.02
- French nuclear outages to add 20 million EUAs demand over 2022: EDF says these will mean nuclear generation cuts from at most 360 to 300 million tonnes of CO2 – a conservative estimate suggests that could add 20 million tonnes of CO2 into the atmosphere for 2022, which is large but only adding to a market shortage of EUAs vs. emissions of around 300 million tonnes of CO2 spread over the year. That demand is spread out over 2022 however, which might help to explain the lack of bullish response to the news on Monday.
- Neutral trading in wider markets – waiting on US monetary policy? EUAs above 80 euros seem to be trading there on sentiment more than with major fundamental backing. German stocks are looking in holding mode and news of worsened industrial production for Germany and France last November could weigh on EUAs. The US Federal Reserve is expected to increase interest rates from March. The People’s Bank of China is doing the opposite, while the EU is expected to follow the US eventually, leaving investors waiting and watching. ICE commitment of traders data shows largely unchanged investment fund long positions week on week.
- The IEA forecasts stagnant growth in electricity demand for Europe for 2022 compared with last year – global growth has contributed to the current energy crisis, which could cool the EU ETS for 2022 somewhat in spite of major questions around gas supplies and nuclear outages.
- Colder weather through to mid-February: The weather outlook for Britain and North Western Europe looks cooler, which could prompt additional heating demand.
- Bearish potential? – Low natural gas storage levels could prompt demand destruction: European gas storage levels are at record lows, having slipped under 50% capacity as the chart from Bloomberg below shows. The unplanned outage in Norway adds fuel to the fire. Counterintuitively, cold weather and low gas storage could prompt demand destruction for EUAs as industrial plants are forced to shut down. This demand destruction would likely need to come from government orders to conserve gas supplies for domestic heating as we head into a cold period of weather however, to have enough of an impact to bring more EUA attractive prices.
- War in Ukraine? Markets seem not to be pricing in longer term risk yet: last week’s negotiations ended inconclusively and since the US have warned Russia may be planning a false flag operation as a pretext for invasion, while cyber attacks hit Ukrainian government websites. Extended conflict in Ukraine would put gas flows from Russia into doubt and result in high energy prices for years. As the below graph shows though, we’re not seeing any signs of panic for future dated gas prices as yet.