Weekly carbon trading market update

Market developments:

Carbon ends the week 39c higher at €5.45
7% weekly gain despite price falls at the start of the week
Fundamentals take over as continued cold weather ensures demand stays high
Lower prices earlier in the week induce installation demand ahead of compliance in April

EU Allowance Auction Overview

Five auctions this week bring ~22.4Mt to market, up from ~17.3Mt last week
Failed UK auction volume from 14th December, 2016 will be split across the first 4 UK auctions in 2017, taking the volume in each auction to ~5.14Mt from ~4.27Mt previously expected.
See auction table below for more details.

EUA Price Action

Carbon market fundamentals eventually took over last week as a lower auction volume and the continued cold weather helped carbon prices push higher, despite having fallen at the beginning of the week. Brexit uncertainty dominated the first part of the week as global markets moved lower on expectation of a ‘hard Brexit’ ahead of UK Prime Minister Theresa May’s speech on Tuesday. Carbon trading hit the intra-week low of €4.62 on Tuesday before the speech which was to provide some clarity on the path ahead for the UK. Following the speech carbon moved higher in parallel with energy and stock markets, likely due to the removal of some uncertainty leading to short traders taking profit. We highlighted in our previous update how moves below €5 would bring industrials to market to provide further support as they looked to cover their shortfall ahead of the April compliance deadline with ‘cheap’ carbon. This, coupled with the profit taking, took carbon back above €5 on Tuesday afternoon. The cold weather provided continued support through the week as utilities covered the extra exposure they faced with power and heat demand remaining at peak levels. The market stayed supported despite the prospect of more auctions this week. This smoked out the shorts and resulted in a near 8% gain as the week closed at the highs. The current high demand for power and heat ensures that near-dated power spread returns are currently high however longer dated clean dark spreads suffered as power prices at the back end of the curve could not match strong prices at the front. Price Impact: 2017’s higher auction volume is currently being offset by colder weather and nervous shorts. Fundamentally, this week should be softer based on the additional 5Mt of auction volume but supply and demand are reasonably closely matched at present. This means that the market is very sensitive to every additional cold day and every large industrial buyer. We expect a neutral week with dips being bought by industrials. However rallies may trigger speculative shorts to buy more so volatility remains on the cards. The real test for carbon will come when the freeze eventually lifts and temperatures move higher. EUA trading prices are expected to drop when this eventually happens.

Week ahead

We are back up to five auctions again this week as 22.4Mt comes to market which will help temper any moves higher. The increased supply should be offset by utility demand while temperatures across Europe remain below seasonal norms. The close on Friday was just 9c shy of the weeks high giving carbon some momentum going into this week. The signals are mixed but the momentum means there is a chance of further small gains while the downside is protected by early compliance buyers.