This week, EUAs look likely to be pulled higher by three bullish factors: 1) continued coal burn as gas prices remain too high to be competitive with coal fired power and Germany moves to end dependence on Russian gas, 2) colder forecast weather and 3) a verdict from the European Securities and Markets Authority on possible market manipulation in the EU ETS that should give confidence to investors. On the other hand, bearish risk as Russia demands gas payments in rubles – which could prompt a stressed situation in which margin calls on gas futures contracts and potential industrial shutdowns threaten to sharply cut EUA demand. Below, with bearish influences listed first, we also touch on the lack of speculator interest in the market, a colder weather forecast, ESMA’s report findings, and evidence of longer term coal burn as Germany looks like easing their coal phaseout ambitions. Overall, while we see reasons a correction could come, these have yet to materialise, and with the market remaining very tight and emissions high, we have a bullish outlook. 

  • March 22 futures contract expiry today: last week’s options expiry saw selling of positions, we may see some selling as March futures expire.
  • Europe looks unwilling to pay for natural gas in rubles: Russia last week demanded payment in rubles for gas supplies, which EU member states seem unwilling to do. A sudden spike in gas prices could prompt margin calls for utilities once again, which could prompt some EUA selling, so it remains to be seen whether Russia backs down – we should know by Thursday.
  • Industrial demand destruction remains a risk: we aren’t hearing of significant cuts to production that would limit EUA buying through the grapevine as yet, apart from two Volkswagen factories in Poland. A cut to gas supplies could prompt significant hardship for EU industry and the economy however.
  • Low speculator interest: stressed market conditions meaning higher cash requirements to open and maintain EUA futures positions may be keeping many speculators out of the market after the recent price drop. Doubt about Europe’s economic outlook may also put longer term speculators off. See the ICE Commitment of Traders chart below. Lack of speculator interest may also limit how far the price can drop, as they are key sellers when larger price dips happen. We may see increased speculator buying after the ESMA ruling, below.
  • European Securities and Markets Authority report on manipulation in the EU ETS finds no evidence of ‘major deficiencies’, but does suggest position limits for non compliance traders and enhanced reporting requirements. No finding of untoward behaviour should give confidence to speculators and send a bullish signal to the wider market.
  • Germany to delay coal phaseout? German sources are quoted as saying the coal phaseout will be delayed ‘until further notice’ though with the idea that 2030 remains a cut-off date. That isn’t necessarily bullish in itself as there is no guarantee the coal plants remain competitive vs. gas and renewables, but keeps fundamental market drivers relatively similar to now, so we look to fuel switch potential through 2023 for a hint of buying interest and likely price developments. Note on chart 3, fuel switching is likely ruled out even in summer 2023.
  • Cold weather forecast this week: Reuters week ahead expectations for TTF natural gas are bullish on colder weather, particularly from Wednesday – that also means more EUA demand from power generation. With that said, geopolitical changes are likely to have an outsized influence on market fundamentals.

Outlook: bullish

  • Indicative EUA Price: €81.00
  • YTD Average EUA Price: €83.40
  • Month to date Average EUA Price: €74.13

Charts

1 – Dec22 EUA price chart 2 – ICE Commitment of Traders – Investment Fund Total Long Positions vs. EUA prices as of 18 March 3 – Summer 2023 Fuel Switching levels for natural gas prices

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