Less EUA auctions than usual and continued high emissions with fuel switching impossible should combine to maintain EUA prices, if not send them higher this week. Gains may be more likely in the second half of the week, when there are no auctions. Last week’s price drop was largely on sentiment, not fundamental market drivers. A more stable, cautiously bearish gas market should provide support for EUAs. The European Council is set to discuss REPower EU this week, and the European Parliament’s plenary session from 6-9 June may be the next source of market volatility as the European Parliament Environment Committee’s ambitious reforms to the EU ETS may not survive the full European Parliament. Investment funds have significantly cut their long positions so we could see this limit price gains as the market waits to see what will happen next. Any leaks from political discussions ahead of the Parliament’s plenary session could cause some volatility. 


Auction volumes are 5.01 million EUAs, 2.66 million less than last week, which was a week with lower auction volumes than usual already. Two auctions are scheduled this week, for Monday and Tuesday.

The risk of gas flows being cut off due to non-payment in roubles appears to have subsided. Most European buyers are complying with the Russian payment terms. A cut off from Russian gas supplies could send EUA prices materially lower as demand destruction fears and margin calls for gas contracts prompt EUA sales.

TTF Gas is trading in the mid-80s of Euros, providing some stability to EUA prices. Aside from the issue of payments for Russian gas deliveries, European storage looks on track to be ready for next winter. Risk of needing to ration gas in the mid to long term remains however. 

Fuel switch potential still limited: In spite of relative weakness for gas prices, weakness in coal prices as well has made fuel switching more difficult. Therefore short term emissions reductions still look difficult, and EUA prices should stay supported. See chart 3.

Last week’s price drop looks mostly sentiment driven: the REPower EU proposals to sell 200-250 million EUAs roughly prompted EUA prices to crash from 92 to 77 euros over the span of a few days. These proposals may never become law – The influential Environment Committee within the European Parliament may be unlikely to approve a one-off boost to supply as it’s own proposals seek to tighten the the Fit for 55 package further. 

Investment funds reduce long positions due to REPower EU proposals involving MSR. ICE Commitment of Traders data shows a drop to total Investment Fund Long Positions of 12% week on week. See chart 2. This could limit potential for price gains as traders wait to see what will happen with regards to proposals to strengthen the Fit for 55 Package more in European Parliament. 

European Parliament plenary session 6-9 June: The Environment Committee ENVI’s proposals will be up for discussion next week. These ambitious reforms to the Fit for 55 package may struggle to survive the scrutiny of the full European Parliament. Though no announcements are scheduled this week, any leaks could prompt volatility for EUAs. 

European Council works towards further sanctions: Josep Borrell of the European Commission is bullish on the chances of getting some sort of of a deal on an oil embargo. Hungary is showing little enthusiasm. Sanctions could yet prompt a response from Russia which could affect the EU ETS.

Wider markets: risk of recession in mid-term remains. The Ukraine war and Chinese lockdowns continue to weigh on European economies. Asian and US stocks have opened strongly on Monday. The S&P 500 just posted it’s best week in 18 months on what looks like short term optimism. Central banks however are still faced with the problem of inflation stemming from food prices, energy prices and covid lockdown support programmes. 

Outlook: bearish

  • Indicative EUA Price: €84.40
  • YTD Average EUA Price: €83.28
  • May average EUA Price: €85.78

Charts

1 – Dec22 EUA price chart 2 – ICE Commitment of Traders – Investment Fund Total Long Positions to 20 May
3 – fuel switch – EUA price required for fuel switching

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