This week we hold a neutral to bullish outlook for UKAs on strong fundamentals – but interest in the UKA auction that is likely to be dominated by those swapping EUAs to UKAs, given UK Government intervention in the market next year. UKAs should be attracted towards the EUA price – the price differential is a key metric to look to. The current <€1 premium that UKAs hold over EUAs should mean current prices at ±£73.70 are good value at auction – depending on whether EUAs can maintain current levels or not. Besides that, fundamentals for the UK ETS are strong with continued cold weather and low wind levels, though compared to the EU ETS there is less to boost UKA buying demand given the UK ETS’s more generous overall emissions cap and relatively less influence of fuel switching from coal to gas – so we’re seeing less fundamental change in market drivers than in the EU.
UK ETS Outlook: neutral – bullish
- UKA auction this week; price difference from EUAs negligible: UKAs are trading at a premium to EUAs of only approximately 80 Euro cents. This likely means that as long as EUAs can hold onto these sorts of prices, UKAs are likely to stay at current levels (£73.70).
- Fundamental demand likely to be strong: continued cold suggests continued fossil fuel burn, with low wind levels. Risk remains to the upside on utility buying demand to cover their power generation.
- UKAs pricing on demand for EUA to UKA swapping: UKA price developments are being driven in the short term by a mixture of current hedging requirements and swapping of a backlog of EUA hedges to UKAs by utilities. When that backlog is cleared, it leaves the market long and price expectations neutral – meaning worsening prospects for gas supplies do not have the same impact for UKAs as they do for EUAs, so our outlook is less bullish.
- Indicative price: £73.70
See also our EU ETS market update here