EUAs look set to hold onto recent gains this week, with a supportive energy complex driving buying interest, but trading could stay rangebound under €85. Colder weather is driving both higher gas prices and driving stronger EUA demand. Cold weather looks set to persist a bit longer, though German temperatures are forecast to be slightly milder than last week, and the end of the week should bring milder temperatures still. Political developments should take a back seat, with Fit for 55 just requiring rubber stamping – though elements of the package are now being signed into law. The European Parliament will vote on ETS reform in February. Looking slightly further out, a head and shoulders technical formation appears to be forming – a reliable indicator of a turnaround in trading direction. Price developments around the €85.40 level could be instructive as to where EUA prices go next – this looks like a formidable resistance level.

Important note for compliance buyers: free allocation of EUAs looks likely to be delayed, possibly beyond the 30 April compliance deadline. This seems to be due to changes in activity levels for many compliance buyers (more or less than 15% vs. historical average) which have complicated calculations – the same thing happened last year. 

  • 9.9 million EUAs will be sold at auction, 1.9 million less than last week. 
  • European gas storage sits above 79% as of Friday
  • Cold weather to persist this week: Central European temperatures are 5-8 degrees celsius above the seasonal average. If relatively mild temperatures look like the status quo this winter, spells of colder weather will represent bullish risk. Balkan countries are already experiencing snow – Bullish
  • Wind generation is weak: last week’s wind powered generation in Germany was 20% below seasonal averages. Week four has started with even weaker wind generation levels. Bullish
  • Market remains tight as industrial demand remains: gas demand in 2022 was 10.26% lower than the five year average (ICIS figures) – which would suggest curtailed industrial production. However a switch to running on crude oil – by some power generators and some refineries – would add emissions. This continued EUA demand may go some way to explaining why EUAs are still easily able to trade above €80. Bullish
  • Fundamentals turn bullish: wind levels have dropped considerably and will likely keep EUAs supported. Natural gas fired electricity remains less profitable than coal fired power generation for 2023. Cold weather persists and gas prices have seen a modest uptick, in response. Bullish 
  • 2026 fuel switch looks possible again, but nearer dated gas generation remains unprofitable: see the chart below – with around 10% of generation typically hedged three years into the future by utilities, fuel switching in 2026 isn’t a huge deal for the market. 2025 power generation still should favour coal over natural gas. Bearish – but only to a small extent. 
  • Why the head and shoulders technical reversal pattern? Playing into signs of a possible correction for EUAs could be 1) additional EUA sales by REPowerEU, 2) weak macroeconomic outlook, 3) better renewable / nuclear performance than last year (though French nuclear has potential to underperform) 4) continuation of emergency measures to cut gas demand – looking ahead to next winter, 5) forecast warmer weather from the end of the week.
  • Technicals: €85.40 to today’s high €86 is key resistance as pointed out last week. A head and shoulders formation is developing (shown on chart 1 below). This could be a strong indicator of an eventual reversal in trading direction if prices fail to post gains past €85.40. A break through resistance would likely send the market near to the €90 level. EUAs at present are however contuing to trade strongly in the upper half of the Bollinger Bands, albeit with MACD, RSI and momentum indicators suggesting the bull run is running out of steam. With 200 day, 100 day and 50 day moving averages running in parallel, we might expect a sizeable market move at some point.

R3: 88.84

R2: 87

R1: 85.40-86

CP: 84.50

R1: 83.13

R2: 80.50

R3: 77


Outlook: neutral to bearish – €80 to €85 – look to a break of 85.4-86 which could suggest further gains

  • Indicative EUA Price: €84.50
  • 2022 Average EUA Price: €81.21
  • January Month to date average EUA Price: €80.95

 

Charts

1 – Dec23 EUA price chart

Note annotation – head and shoulders pattern and moving averages – which are starting to run in parallel

2- Fuel switching front month, 2024, 2025 vs. EUA price – ICIS

Chart shows the level EUAs must reach in order to incentivise switch from coal to gas fired power, roughly halving emissions intensity

 

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