This week, Wednesday’s Options expiry is likely to pull EUAs towards 80 Euros. The outlook after Wednesday is less certain however. On one hand, high gas prices have kept coal fired power, twice as carbon intensive as natural gas, locked into European power generation. On the other, however, the threat of industrial shutdowns in response to high gas prices, and a wider downturn in economic performance represent credible bearish risk. Though EUAs look likely to stay near 80 euros due to the options deadline, after Wednesday the market could become more volatile and unpredictable, on low traded volumes and a lack of speculator interest. A return to 60 euros looks as plausible as an increase to 90 euros. 

  • Options expiry to pull EUAs towards €80? As of last week there were approximately 8000 lots of call options held at an €80 strike price set to expire on Wednesday, which could keep EUAs trading around the €80 level.
  • Enel, Uniper and RWE are reporting increased hedging for 2021 – signifying increased fossil fuel burn, which might be a useful confirmation that there is some fundamental support for the quick return from 60 euros to 80 euros.
  • Sunny, mild but calm weather keeps fossil fuels in the mix in Northern Europe: a high pressure area over Denmark is giving us sunny weather, but not much wind – good for solar generation, but not for comparatively larger capacity wind generation. Therefore fossil fuel demand looks set to remain. Our fuel switch model suggests gas prices aren’t too far off being competitive with coal, though they’ve been this close previously without allowing for fuel switching, as chart 3 shows.
  • Enel finished buying EUAs for 2023: Enel report that they had hedged 100% of Y+1 generation already by the end of 2021, suggesting less compliance buying is to come from them – a mixed influence given EU ETS covered power generation has increased at Enel.
  • Economic uncertainty means downside risk: utilities are still under stress from recent energy price spikes, 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.
  • Low speculator interest: the latest ICE Commitment of Traders data (see chart 2), which shows overall EUA holdings by a variety of market participants, shows no increase in investment fund long positions to match the EUA price increase.
  • EUA price to drop on free allocation selling? Member states within the EU ETS have apparently distributed 50% of free EUAs. We haven’t seen much to indicate selling by heavy industry so far however.
  • Delay to compliance? The German MEP Christian Ehler suggested moving the compliance date from 30 April to December. Most market participants are skeptical this would even be a big help, while many industrial companies will have bought at the recent price dip, so a new compliance date seems a) unlikely and b) should not have a big impact on the market unless it prompts selling. Most EUA demand comes from the energy sector, who buy as they sell electricity.

Outlook: bullish / neutral until Wednesday, downside risk after

  • Indicative EUA Price: €78.30
  • YTD Average EUA Price: €83.51
  • Month to date Average EUA Price: €72.52

Charts

1 – Dec22 EUA price chart 2 – ICE Commitment of Traders – Investment Fund Total Long Positions vs. EUA prices as of 11 March 3 – Fuel Switching levels for natural gas prices

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