EUAs last week broke through technical resistance around €81.80 which seems to have triggered buy orders by speculators. On top of that, we’re in the last week before the 30 April compliance deadline, so last minute compliance buyers may have no choice but to buy at these higher prices. With that last minute compliance demand and coal fired power generation still favoured over natural gas, the market should find support. All of this should leave us in bullish territory, but wider markets are dragging the EU ETS lower on Monday morning and the near to mid-term potential for a price drop previously discussed remains. We are looking for a close under €81.82 for the market to look like it will return to the previous €77 to €82 range of trading. On balance, Monday’s trading and the credible reasons for a correction give us a neutral if not bearish view, depending on whether we can breach technical support. We continue to warn that there is near term downside risk. 

  • EUAs break technical resistance, head into bullish territory: we’re looking for a close under €81.82 for a sign of further losses. Traded volumes remain relatively thin and with enough credible reasons for further price drops, buyers looking to hold EUAs long term may not prove particularly enthusiastic about buying at these prices.
  • Speculator buying drives prices higher now, but could exacerbate a price drop later: we can only infer speculator involvement from the jump up in price through the technical resistance last Wednesday – the ICE Commitment of Traders data to be released this week should give us a firmer idea of speculator involvement in the market after a few weeks of reluctance to buy back in (see chart 3). If speculators have bought back in, a bout of selling in a short time period might exacerbate any eventual price drop. It’s typically the speculators who sell when we see EUA prices crash.
  • EUA price increase mostly unbacked by significant moves in natural gas and coal contracts: near dated coal and gas deliveries (i.e. May 2022 TTF gas) have mostly contined to trade neutrally up to the time of writing on Monday morning, as LNG deliveries and Russian gas deliveries bolster storage. Looking out to further dated fuel switching, Summer 2023 Gas prices increased slightly on the 20th at the same time as EUAs broke resistance and moved higher from €76 to €80, but that shouldn’t have a large impact on fuel switch potential given that front month gas prices needed to reach €82.95 on Friday, vs. an indicative TTF gas price of €97. Therefore emissions reductions from fuel switching are already ruled out through 2023. See charts 2 & 4 for a view on this in chart form.
  • Bearish potential previously flagged still exists: given stressed market conditions, threat of industrial shutdowns, and perhaps most importantly the threat of recession, there would seem to be good chance of seeing lower EUA prices in weeks to come. Wider markets on Monday are dropping apaprently on covid fear coming from Asia, high commodity prices and potential interest rate hikes. With that said, yearly EUA demand exceeds yearly supply of EUAs so if any market is to be resilient to a recession in the long term, it’s likely to be the EU ETS.
  • Demand destruction: European industrial demand for natural gas has fallen by 9% since the beginning of 2022 – a similar level to Q2 2020 during the first phase of covid. This would have bearish implications for the EUA price if factories continue shutting down or reducing production levels.
  • Last minute compliance buyers may help keep EUAs supported, but time is running out to complete purchases – last minute buying interest should fade soon: those still requiring EUAs for 2021 compliance will be forced to buy this week. Residual demand could keep EUAs supported. With transfers of spot EUAs typically taking a day or two, time is running short for EUA purchases, so most buying should be done by now.
  • European Parliament Industry Committee votes for investor limits, political fight to come? The Industry Committee in the European Parliament has agreed to push for speculator limits in the EU ETS, limiting participation only to compliance buyers and those selling EUAs to the buyers. The Parliament’s Environment Committee is pushing for weaker rules, focusing on market transparency and potentially strengthened legislation on market intervention in Article 29a of the Emissions Trading Directive. Following ESMA’s report last month stating that they saw no major deficiencies in carbon market workings, a fight looks set to break out with a significant number of MEPs viewing the hard restrictions proposed by the Industry Committee as a way to weaken the market and climate ambition.

Outlook: neutral

  • Indicative EUA Price: €83.00
  • YTD Average EUA Price: €82.67
  • Month to date average EUA Price: €80.66

Charts

1 – Dec22 EUA price chart 2 – Front Month fuel switching levels: TTF Gas prices must drop convincingly under the yellow line below to suggest emissions reductions via fuel switch are possible. 3 – Investment Fund EUA long positions vs. EUA price

4 – Fuel switching levels for summer 2023 natural gas deliveries – emissions reductions at scale still ruled out.

 

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