This week the trend continues to look bearish on last week’s REPower EU proposal, a possible cut-off from the market for speculators, and wider markets bearish sentiment. Fundamentally not much appears to be different to when we were trading above €90 however. Price losses could be limited by compliance buying activity from the energy sector and a short week, with no EUA auctions on Thursday or Friday. The payment deadline for Russian natural gas deliveries,which represented downside risk for the market, has passed and most European gas buyers seem to have agreed to pay Roubles, though Finland is cut off from Russian natural gas. Stability for TTF Gas should lend support to EUAs. We look ahead to the European Parliament’s Plenary session on 6-9 June for more sources of volatility. A close under €79 could lead to further downside.

  • REPower EU proposal very bearish: the European Commission proposes to sell EUAs from the MSR through to end 2026, to raise money for decarbonisation and a shift from Russian gas supplies. The amount of EUAs would likely be 200 million – 250 million EUAs that the market did not anticipate being available. ICIS had forecast last week this could send EUAs under 80 euros as it has done.
  • But can the REPower EU MSR EUAs proposal make it through the legislative process? The current move lower comes on sentiment, as no EUAs have actually been released from the MSR. It looks questionable whether the proposal, which some are saying could fatally undermine the entire EU ETS, could pass the European Parliament’s plenary (with members of the ENVI, green-leaning group who will be opposed to a fundamental weakening of the ETS voting), and then the European Council – so the ultimate solution could well turn out to be something less bearish than using EUAs from the MSR – and that might limit price losses.
  • Speculator interest fails to recover to 2021 heights: the ENVI vote on Fit for 55 would see speculators cut out of the market, playing into the bearish price action. Investment fund EUA long positions remain roughly unchanged as of the latest ICE Commitment of Traders report. We notice less liquidity in the market than at previous price drops, and recent trading looks to have been characterised by strong buying interest at every price drop. See chart 4.
  • Market fundamentals remain largely strong: low hydro levels in southern Europe, continued lack of fuel switch due to the high gas price, further French nuclear outages and extreme temperatures over 40 degrees in Spain (prompting air conditioning demand) mean EUA prices are likely to stay supported on strong buying demand. German, French, Dutch power prices for H1 delivery are trending gradually lower which could also weigh on EUAs, but they were also trending lower while EUAs were over 90 Euros. Gas prices have dropped, but need to fall a good way further to enable switching from coal to gas fired power.
  • Gas payments issue resolved? Downside risk reduced? Most European buyers seem to have organised themselves to buy Russian gas. Predictability of gas flows and weaker TTF prices should lend support to the EU ETS. If there is a surprise of some sort however with further brinkmanship from Russia, we could see volatility ensue for EUAs.
  • Lower auction volumes than usual to keep EUAs supported? A holiday on Thursday and no German auction on Friday keeps supply limited to 7.67 million EUAs. That’s 1.85 million less new EUAs than last week. There are also no EUA auctions between 1-6 June.
  • ENVI European Parliament Environment Committee votes for ambitious reform: the 4.2% reduction to yearly EUA supplies would be topped up with an additional 0.1% Year on Year from 2025, Maritime shipping joins in full from 2024, the upper threshold for the MSR drops from 833 million to 700 million, and aviators would lose their free EUAs by 2025, and be liable to pay for emissions from flights from third countries. These are ambitious reforms that seem unlikely to pass the European Parliament plenary, so by the end of the legislative process we might have proposals that look more like the European Commission’s originals from July 2021.
  • European parliament plenary 6-9 June: debates on Fit for 55 proposals – ETS revision, CBAM, aviation – contact us for more detail on the proposals from the Commission, ENVI Committee and European Parliament industrial committee.
  • Stagflation: the European Commission has revised its growth forecast for the Eurozone down to 2.7% from February’s 4.0% forecast, while its inflation forecast has been increased from 3.5% to 6.1%.
  • Technicals: we’ve broken out of the uptrend both looking at the price chart and MACD, which we suggested might be running out of steam.  We see considerable support around €79 looking at previous support and resistance levels (see chart 2), and the beginnings of a downward channel. If we hit €76.75, we might see further losses as this level represents the neckline of a possible head and shoulders formation. Four red candles in a row on the daily chart might be enough to keep EUA price action looking bearish.

Outlook: bearish

  • Indicative EUA Price: €78.50
  • YTD Average EUA Price: €83.36
  • May average EUA Price: €87.11

Charts

1 – Dec22 EUA price chart 2 – Technical levels
3 – German fuel switch – the red line must dip under the yellow line for fuel switch and emissions reductions to be possible. 4 – ICE Commitment of Traders – Investment Fund Total Long Positions

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