This week we have a neutral to bullish outlook with EUAs already near all time highs. Strong renewable generation should reduce EUA demand, while weather forecasts look relatively milder than had been anticipated. The big factor however that looks likely to determine larger EUA price movements is the situation regarding Russia and Ukraine. Forward gas prices for late 2023 are seemingly responding by moving above our estimated fuel switch levels. Even as gas contracts for delivery in H1 2022 have dropped slightly in price on LNG deliveries, gains to further dated gas prices threaten to rule out emissions reductions coming from fuel switching from coal to gas in the longer term. There are doubts as to whether seaborne LNG deliveries would compensate for a full cut-off from Russian gas supplies.
In other developments, given EUAs are sitting near record highs some MEPs in the European Parliament are pushing for a watering down of Market Stability Reserve reform which could soothe the market, though changing the MSR may make little difference given the ambition of the Fit for 55 package. Finally, we are heading into compliance season with some larger buyers apparently still needing to catch up on their EUA purchases. With EUAs near all time highs and the US Federal Reserve set to tighten monetary policy we may see some caution in buying given there is a long way to fall from here. Therefore risk to gas supplies leaves potential for further price gains, amidst other relatively neutral fundamentals.
EU ETS Outlook: neutral to bullish
Indicative EUA Price: €88.80 YTD Average EUA Price: €84.57
- Windy start to the week, milder weather forecast: storm conditions for north western Europe are allowing wind generation to displace fossil fuel burn. Further into the week the forecast, which had been for sustained cold through to mid-February, is for warmer weather.
- Volatile wider markets: US tightening of monetary policy still looms, with volatile trading on wider markets. Uncertainty and fear of substantial interest rate hikes might keep speculators away.
- Risk of war in Ukraine – Q3 2023 gas prices start to increase: We are seeing gains to gas prices for delivery in H2 2023 coming alongside the return to the highs for EUAs. Though nothing is certain yet with regards to the situation in Ukraine, the market may be starting to assume fuel switching is unlikely to happen through to 2024, thereby keeping EUA demand strong for the foreseeable future. We were looking for a gain on Q3 2023 deliveries above about 45 euros which is a level TTF Gas is now pushing towards. Therefore somewhat bearish price developments for nearer dated gas contracts on news of energy supply diversification may not matter too much to EUAs.
- European Parliament members move to weaken EU ETS due to current high prices, impact may be outstripped by Fit for 55 reforms anyway: a few MEPs are pushing to water down the MSR and ease the boom-bust cycle that has characterised MSR withdrawals lately. This might not have a particularly significant effect as the EU ETS will implement a stronger 4.2% annual reduction to EUA supplies, limiting the impact of the MSR anyway.
- Maritime LNG deliveries hit new highs, USA to send ships if Russian supplies are cut, but deliveries unlikely to compensate fully for pipeline supply: the USA has said it will send LNG ships to Europe if gas flows are cut, but analysts think this is unlikely to make up for usual pipeline supplies. Other LNG supplying countries tend to have long term contracts preventing them from diverting ships to Europe so a quick diversification of the EU’s energy supplies doesn’t look like it’s on the cards.
- Compliance season: typically EUA prices don’t take a large jump higher, but those putting off buying in hopes of lower prices may be forced to come to market in the next weeks. The Romanian state-owned utility CE Oltenia has been granted €2.66 billion for restructuring – which may be used to finance EUA purchases between now and April.
- Emissions are rising when they should be dropping: Andurand Capital Management argue that French nuclear outages, German nuclear phaseouts and the energy crisis are sending European emissions the wrong way. Combined with an ever shrinking market balance, EUA prices could increase further in 2022.