Weekly carbon trading market update 
Market developments
- Carbon ends the week unchanged at €5.16
- Technical resistance broken but carbon unable to hold onto gains
- Warmer weather forecast
- Debate over Phase IV reform file continues but doubled MSR withdrawal rate appears to have support
- 2.4% LRF, allowances cancellation and cement leakage list inclusion the main sticking points
EU Allowance Auction Overview
- Four auctions bring ~17.3Mt to market, down from ~22.4Mt last week
- February brings nearly 9Mt more to market than January (~79.3Mt v ~70.6Mt)
- See auction table below for more details
EUA Price Action
Week-on-week we saw a continuation of the sideways EUA trading last week as EUA prices ended the week unchanged at €5.16. However, prices crept higher each day of the week until a sell off on Friday undid all the previous gains. Large parts of last week followed a similar pattern as the market climbed after the auction only to fall back towards the end of the day, tempering gains. The market has been rangebound for a while now and that looks set to continue until at least Wednesday when the parliament vote on the Phase IV reform file takes place. Debate on the file is still very much on-going and the result far from certain. The doubled MSR rate appears to still have strong support with the main sticking points centred around the Linear Reduction Factor, any potential allowance cancellation and the inclusion, or not, of the cement sector on the leakage list. The on-going debate is contributing to lacklustre EUA trading as traders are wary of building longer term positions, instead opting for shorter term carbon trading. The market hit €5.44 on Thursday having broken through technical resistance but was unable to build on the gains. A sell off at the end of the day pushed it lower into the close. Friday saw prices fall further as power prices at the front end of the curve tumbled, likely due to warmer weather on the horizon, dragging carbon lower. Price Impact: having broken through technical resistance it seemed as if further gains were in store, the fact that carbon was unable to build on the gains does not bode well. If carbon is unable to rise with support from cold weather and compliance buying the signs do not appear positive for the rest of the year.
Week ahead
One less auction this week should provide support for carbon prices but all eyes are on the parliament vote on Wednesday. Agreement on the Phase IV reform file is not certain. Progression of an ambitious reform file will still not alter the fundamental demand and supply levels until at least 2019, making any bullish reaction to an agreement a temporary move higher. Should MEPs fail to find agreement prices will likely tumble and it is hard to see where any material recovery comes from considering current price forecasts. In the absence of an agreement in parliament it appears the original European Commission proposal will be taken forward. Additionally, current weather forecasts suggest some warmer weather is on the way for much of Europe. Overall this week is a mixed bag and the parliament vote makes it difficult to call. If the weather does indeed turn warmer it is hard to see how carbon can maintain current levels.
