We have a neutral view this week, though a close above 79 euros would suggest we might have more gains coming and a swift recovery as we switch to the December 22 contract as the benchmark. Heading into Christmas we expect a mostly subdued week of trading as many market participants will be going on holiday – and speculators will not want to take risks so close to the end of the year – which may have fed into the selloff on Friday. With speculators and market regulation a hot topic and potential further selling to come, there is some downside risk – demand destruction could also come into play in Q1 2022. Wider market fundamentals remain strong, however, until there is some resolution to the energy crisis and we have good reason to believe EUAs will be unlikely to head back down to the €60 mark. Below we discuss the European Council’s talks on speculators and Fit for 55 and the potential market impact of those talks, as well as fundamental dynamics affecting the market in the short and medium terms.

EU ETS Outlook: neutral

           YTD Average Price: €52.78   Indicative EUA Price: €78.00

Last week’s 14% correction leaves the market wondering if compliance buyers will buy at these prices, assuming this is a dip, or if there is further downside to come. Monday afternoon trading suggests the market will find support.

  • Selloff finishes near lows – more to come? Proximity of drop to Dec21 expiries suggests strong fundamentals may take hold again soon. The close near the low of the day on Friday and uncertain trading on Monday suggest there may be further downside to come. The proximity to the Dec21 Options expiry and Dec21 futures expiry suggest length in the market needed to be sold off in a short space of time however, so once we start with Dec22 futures, fundamentals may take hold again.
  • Price increased on options hedging, but fundamentals (Nord Stream 2) also supportive of a price increase. Though much trading last week was dominated by speculators, delays to Nord Stream 2 have pulled the market higher, searching for sources of decarbonisation as prospects for fuel switching get pushed further and further away into 2023. Winter 2022 looks set to prompt volatility as these dynamics change as dwindling gas supplies, cold weather and circumstances in Ukraine stress the market. Nord Stream 2 is still unlikely to soothe the gas market until at earliest late Summer 2022, even as the German Chancellor Schulz has sought to decouple the fate of the pipeline from the Ukraine crisis.
Graph shows forward curve TTF gas prices from October and December – gas prices have moved above the level at which gas would be cheaper to run than coal for every contract for 2022 delivery, ruling fuel switching and therefore the bulk of EU emissions reductions out for 2022 as it stands.
  • Heading into Christmas we anticipate more relaxed trading as speculators, who may have sold to capture profits ahead of the Christmas and New Years period, keep away and compliance buyers most likely go on their holidays. The price drop on Friday was most likely prompted by end of year profit taking and the expiry of the Dec21 futures contract – so traders have to get out of their positions or take delivery of EUAs.
  • Talk about the influence of speculators on the market has intensified since EUAs broke above €80. Prospects of intervention may have also fed into Friday’s correction. Trading volumes above €80 were noticeably thin, few industrial compliance buyers were willing to buy and options traders seemed to do most of the day to day buying and selling. Heads of state are set to discuss this and the Fit for 55 package this week, and apparently are struggling to come to much agreement on possible market interventions or the realities of implementing the Fit for 55 package – so there is some short term bearish potential. France is one of the countries advocating for short term price controls, and will hold the EU Presidency for H1 2022.
  • EUAs gained €60 in 2021 – one way trading attracts speculators and they may not see the market as such an easy prospect next year: Starting next year from a high point at around €75 and with plenty of downside risk from Nord Stream 2 and illustrated by recent price drops of €10 and €11, there is no guarantee speculators other than market specialists will so enthusiastically buy EUAs
  • The short term picture from a fundamental perspective still looks bullish – with a tight market, little prospects of substantial emissions reductions for winter 2022, and in the short term, the coldest months of the year with no EUA auctions after Monday, French nuclear outages and the closure of German nuclear capacity coming, which means an increase to emissions. Meanwhile, low wind levels and sub zero temperatures will also help to keep EUAs supported.

Therefore, we don’t anticipate major price losses from the ±€75 level in the near term, and a consolidation for the rest of the year at these prices looks a reasonable bet.

For more details on market outlook & protecting against your carbon risk, please email or call +31 20 522 0292

See also our UK ETS market update here