Market Development
• Prices finish the week at €6.81, ~4% down.
• Tight trading and settlement range with low volumes in subdued market
• Main moves for the week based on the MSR announcement
• Trilogue mandate given to Latvia after compromise found in Wednesdays MSR meeting
• Market awaits outcomes from 1st Trilogue meeting (today) and emissions data publication (Weds)
Auction Overview
• Only 4 auctions this week due to the Easter holidays, total of 11.877mt enters the market.
Price Action
Carbon emissions trading prices fell 3.95% last week amid subdued trading. The 28c drop in the front December contract happened in tight trading and settlement ranges as the first four days of last week settled within 10c of each other. The fall on Friday came late in the day amid thin volume and after the lowest cover ratio on an auction in the year to date, indicative of the current malaise surrounding the market. Much of the week’s price action centred around the MSR meeting on Wednesday. Prices fell sharply in the morning after an announcement of no progress in the negotiations to hit the week low of €6.77. Prices recovered from there as it was announced the negotiations would continue in the afternoon and that Western European states, led by the UK, were pushing for an agreement to be found by the end of the day. After the close it was announced compromise had been reached, more on this in the MSR section below. The open on Thursday was subdued but the compromise fuelled some positive sentiment in the market and buyers elevated prices to the weeks high of €7.29. Elsewhere, power prices advanced slightly but could not keep pace with coal gains leading to a slight worsening of the clean dark spread. Price Impact: with the start of trilogue on Monday (and no progress expected to be made) and verified emissions data being released on Wednesday 1st April (see section below on analyst expectations) ahead of an extended Easter break, absent some surprises it is possible the current malaise continues until after Easter. This is because the more speculative traders will be wary of entering into large positions ahead of times of uncertainty and a major holiday.
Market Stability Reserve (MSR)
Compromise was found this week in the meeting of permanent representatives to allow the MSR process to advance onto trilogue negotiations. In summary the member states want an MSR start date no later than 2021, backloaded volumes straight into the reserve and the EC to decide what to do with unallocated allowances.
Important MSR Dates
• 30th March – start of trilogue
• 5th May – trilogue meeting
• 26th May – trilogue meeting
1st April emissions data release – analysts’ expectations
UK GHG emissions fell 8.4% in 2014 according to initial data released by the government. The fall was attributed to a reduction in the use of fossil fuelled power generation as the UK switched to cleaner renewable energy sources. The official release of the verified emissions for the EU ETS is expected on Wednesday 1st April. Energy Aspects are predicting falls of 6% across the whole of Europe as the shift to renewable energy gathers pace and warm weather reduces demand for power.
According to a poll of 10 analysts by Montel the median expectation was a 5% drop in emissions to 1,800mt which would mark a fall of 95mt relative to the 1,895mt the European Commission verified for 2013. Estimates ranged from a decrease as little as 50mt (-2.6%) to as much as 111mt (-6.3%). A steep fall in power and heat emissions likely outweighed some recovery in industrial demand for CO2, most analysts said.
Price Impact: market participants will watch the release of figures closely to try and understand the future underlying demand in the market. Variance from expectations could send the market quickly in either direction but underlying short-term supply and demand will be unaffected so moves will likely be short lived.
