As in previous weeks we flag near-term downside risk but retain a neutral view for the week ahead. High commodity prices are forcing some industrial shutdowns or production cutbacks, and threaten to produce more and potentially push Europe into recession. These could be exacerbated as the issue of ruble denominated payments for natural gas deliveries has not yet been satisfactorily resolved, potentially implying a threat to continued Russian gas supplies. Coal fired power generation is more profitable than natural gas fired electricity at present however, implying higher emissions and balancing out lower demand, bearish sentiment from industry or from milder spring weather for now. Traded volumes remain low – speculators seem to have little interest in rebuilding their long positions. Demand continues to exceed supply by a significant margin in the EU ETS so until these risks come to pass, EUAs could trend higher and any price dips are likely to be keenly bought. 

  • Utility demand is likely to keep EUAs supported this week: it seems most current EUA demand is coming from the energy sector. Coal remains the more profitable source of electricity compared to natural gas fired electricity, so EUA demand remains high. Demand exceeds supply in the EU ETS, so any price drop is likely to be swiftly bought back, unless emissions can be abated at large scale, in a permanent way.
  • Payments for gas in rubles – will currency conversion contravene sanctions? Last Thursday Vladimir Putin said that some companies have not paid for their gas deliveries yet even though Gazprombank can convert Euros to rubles. The European Commission is warning that this could undermine the EU’s own sanctions on foreign currency conversions. The Netherlands government has advised it’s companies not to sign contracts with Gazprom. Even Germany has said that the requirement to have a second bank account in rubles would be an attempt to get around sanctions, though the Italian government are arguing this would not be a problem for European consumers.
  • Russia showing flexibility on gas payment so far, cut off not looking too likely: Putin has supposedly told the Austrian Chancellor Nehammer that payments could still happen in Euros and last week said that Russia would continue to provide gas as it ‘values its business reputation’. Therefore it would seem business as usual continues for the most part at least for now. Further contract deadlines to look out for are coming in May.
  • High gas price threatens cuts to industrial output; recession: modelling indicates that German economic output could be hit by 220 billion euros over the next two years in the event of a cut-off to Russian gas supplies. ICIS are estimating a drop of 11.4 million tonnes of CO2 emitted by industry if gas prices stay elevated through 2022 vs. French nuclear outages which likely add 10-20 million tonnes additional emissions. ICIS also forecast a cut to EUA demand amounting to 100 million tonnes of CO2 if the gas is cut off vs. industrial emissions of approximately 600 million tonnes of CO2 per year.
  • Wider recession risk: supply chains are struggling – China has imposed lockdowns on major cities including Shanghai. These factors could also draw European economies into recession
  • Gas market trading high, but potential for volatility? Meanwhile with gas flows improved since the start of the war in Ukraine, TTF gas appears to be trading at a risk premium due to the war, even as LNG deliveries ramp up and Russian gas deliveries have improved since the invasion began. Chart 2 shows the TTF Gas price chart for May gas deliveries – decreasing volatility as shown by the Bollinger Bands represented on the chart, which may suggest a breakout higher or lower could be on the way.
    • Sharp increase to gas price could stress utility positions and prompt EUA selling: similar to what we saw in the last major price dip, except this time speculators do not have as many EUAs to sell and utilities will be a, so price losses may be relatively more limited.
    • Decrease to gas price could bring return to fuel switching: still only a remote chance – our model (chart 4) suggests we need gas prices to hit €82 vs. current front month price of €93 to make fuel switching possible, with coal at currently elevated prices ahead of the embargo on Russian coal starting from August. A price drop for gas would likely prompt volatility for EUAs.
  • Speculators continue to stay away: ICE’s commitment of traders report shows investment funds are not adding much to their long positions – see chart 3.

Outlook: neutral

  • Indicative EUA Price: €80.80
  • YTD Average EUA Price: €82.51
  • Month to date average EUA Price: €78.78


1 – Dec22 EUA price chart 2 – May ’22 delivery TTF Natural Gas – note declining volatility, narrow bollinger bands 3 – Investment Fund EUA long positions vs. EUA price

4 – Fuel switching levels for front month natural gas deliveries


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