Weekly carbon trading market update

Market developments

Carbon tumbles to end the week 54c lower
Supportive fundamentals remain for time being
Power prices fall as cold weather outlook eases slightly
Stop the clock measure set to be extended to 2020
Power sector emissions fall by 4.5% in 2016

EU Allowance Auction Overview

Back down to four auctions this week bringing ~17.3Mt to market, down from ~22.4Mt last week
See auction table below for more details

EUA Price Action

Carbon tumbled 54c last week as weaker energy prices, five auctions and the possibility of a return to more seasonal temperatures weighed heavily on the carbon market. Below average temperatures across Europe has ensured higher than usual demand from utilities recently as they cover short term needs. In addition, EU ETS compliance buying, especially during price dips, will be present at this time of the year as companies cover their shortfalls ahead of the April deadline. However, with five auctions the market was well supplied and moved lower at the start of the week as power prices fell on forecasts for a possible return to seasonal temperatures, providing the first real test for the carbon markets ability to absorb the increased supply through 2017. Up until now the increase in supply has been offset by below average temperatures across Europe. The falls continued on Wednesday following a weak UK auction but were halted by stories circulating about German support for a price floor. This provided only temporary relief as the rally was quickly reversed into the close. Carbon trading dips towards €5 did induce support from installations as they took advantage of cheap carbon ahead of compliance. This support around €5, coupled with the four of the five auctions completed saw prices head higher on Thursday, hitting €5.25. Carbon was unable to hold onto the gains on Friday as prices tumbled below €5 in the last hour of EUA trading. Price Impact: the majority of the week traded in a fairly tight range as support was found below €5 and resistance at the technical levels around €5.30. The Friday afternoon sell off and close at the low sets a bearish tone. It’s cold at the moment but even with that demand prices are falling. EUA price development over the next few months, based on this week’s form, looks ever more bearish.

Week ahead

The carbon trading market appeared to be finely balanced at the end of last week but the status quo is unlikely to last long. A return to more seasonal temperatures would be a serious test for the markets ability to absorb the supply at these prices. Once a year compliance buying will continue until the end of April but it is unlikely this will be enough to support the market should temperatures move higher. One less auction this week will help and speculators are likely to be wary of taking big positions so close to the plenary vote on the Phase IV reform file, scheduled for 15^th February, so periods of rangebound emissions trading become likely.