Weekly carbon trading market update – 16th January, 2017

Weekly carbon trading market update redshaw-article-logo

Market developments:

  • EUA prices end the week flat at €5.06.
  • Prices rise to €5.71 high in the first half of the week
  • Second half of the week sees prices tumble back down below €5
  • Strong auction results and cover ratios throughout the week provide support
  • Cold weather continues across Europe causing rising power, gas and coal prices
  • Some European member states struggling to meet demand for power

EU Allowance Auction Overview

  • Four auctions this week bring ~17.3Mt to market, down from ~22.4Mt 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
  • See auction table below for more details.

EUA Price Action

Carbon prices managed just a 1c gain last week despite below average temperatures across Europe and rising power, gas and coal prices. We had given a neutral outlook for the week as cold weather and the auction resumption gave contrasting signals. The much-anticipated auction resumption ensured the carbon market was well supplied with more than 22Mt coming to market in five auctions, ~5Mt higher than a full auction week in 2016. The previous week had seen large falls in the carbon price as speculators took the opportunity to go short ahead of the auction resumption, likely targeting the returning auctions to buy back and close out those short positions. The result was price rises in the first half of the week as strong auction results helped push the market higher. This, allied with cold weather, caused prices to hit €5.71 on Tuesday before the rally faltered on Wednesday. Wednesday closed flat having traded both higher and lower during the day, giving mixed signals for the coming EUA trading action. Days such as Wednesday either signal a turning point or just a break in the current price direction. For carbon, it was the former. Prices tumbled ~8% on Thursday as shorts who had previously closed out their positions, reopened them. The end of the week saw prices fall further but a strong German auction helped prices recover slightly to end the week where they had started. Carbon’s struggles played out with a backdrop of rising power prices as temperatures well below average across Europe saw a surge in demand for power. Planned nuclear reactor outages in France were postponed to ensure supply was sufficient while some member states cut off power exports to ensure domestic demand could be met. There were also blackouts in remote areas of Bulgaria and Romania as supply simply could not meet demand. Price Impact: carbon prices failed to hold onto early week gains and ended the week flat despite supportive fundamentals. The extremely cold weather experienced across much of Europe, with higher than average demand for heat and power, should mean utilities are active in the market as they cover the extra demand. If carbon cannot at least hold its head above water with the extra demand at present, it does not bode well for future price action.

Week ahead

Lower auction supply and the continued cold weather forecasts across Europe should provide support for carbon over the course of the week. That said, carbon was unable to hold onto the early gains last week amid similar power demand and the technical picture does not look supportive. Fundamentals do not appear to be in control at present, therefore, further falls cannot be ruled out but they will induce industrial demand as installations look to snap up ‘cheap’ carbon ahead of the compliance deadline in April. Overall, we maintain a neutral outlook.

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