This week’s outlook is neutral, though we could see a Russian invasion of Ukraine impact the market – but the impact hasn’t happened yet. EUAs are expected to trade between €80 and €86 as fundamentals mentioned last week set in. That includes cold weather forecast through to mid-February on the bullish side, and the general bearishness that is affecting wider markets around the world on the bearish side – which should keep any price gains limited. Thin volumes of trading seem to be allowing the colder weather to pull EUAs higher. LNG deliveries by ship are leading to price losses for TTF Gas contracts for delivery in H1 2022, but these are unlikely to influence carbon in a bearish fashion unless they hit around €35 per MWh. Potentially sending EUAs higher, however, would be war in Ukraine which could affect energy prices for years. We’re looking at forward deliveries for gas in 2023 and 2024 for a fundamental signal for further gains. Therefore in spite of the neutral outlook, risk is of higher prices almost every week at the moment.

EU ETS Outlook: neutral

Indicative EUA Price: €84.60   YTD Average EUA Price: €83.39

  • Colder weather forecast through mid-February will mean more heating demand and therefore more emissions. Wind levels have also dropped considerably compared to last week. Monday’s EUA auction was well subscribed with 2.5 milloin EUAs offered and bids for 3.36 million EUAs, selling at €85.75.
  • Bearish wider markets: markets from the S&P 500 to crypto markets are dropping fast as tightening of monetary policy looms – in Europe inflation is even being driven by high energy prices. Investment fund long positions in the market on 14/01/2022 were slightly down week on week suggesting no great interest in buying into the market.
  • Risk of war in Ukraine as previously mentioned has the potential to throw into question gas supplies for the foreseeable future. High gas prices would mean no large scale way to reduce emissions with electricity generation fuel switching from coal to gas. Many news reports are pessimistic about avoiding war. We are looking to see if TTF Gas prices for late 2023 and onwards start to rise as an indicator that the market is pricing this disruption in. As yet, gas from summer 2023 has not yet shown signs of a price increase.
  • LNG deliveries by ship hit new highs: see the chart below – high gas prices are making maritime deliveries of LNG to Europe attractive, pushing gas prices lower, but not to a significant enough extent to bring emissions reductions. €50 would likely be a fair price for an EUA if the energy crisis were resolved, but we’d need to see approximately €35 / MWh for fuel switching while TTF Gas for Q3 delivery is the cheapest offered for 2022 at €72.03.
  • Depleted gas storage could lead to demand destruction: gas storage remains low. Industrial shutdowns could affect the EUA price – but for it to happen at significant enough scale to affect the market we’d likely need governments to enforce shutdowns to conserve gas for domestic heating.
  • Longer term – a more independent, low carbon Europe? Emmanuel Macron has already talked about ending Europe’s dependency on Russia for gas while the German government is setting a target for 80% renewables by 2030 – which could reduce EUA demand. However the trend of ever cheaper renewables looks set to be disrupted by supply chain concerns – meaning costs of adding to capacity will be volatile and less predictable and attractive. Without aggressive emissions reductions EUA prices could rise materially by 2030.

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