Market Development
• Price closes at €8.33, a week-on-week rise of 6.93%
• Prices continued rising and touched a high of €8.36 Friday afternoon
• Reduced auction volumes and stronger clean dark spreads fueled the move higher
• EUR strengthening against USD combined with coal prices falling also pushed clean dark spreads higher
Auction Overview
• 7.541Mt enters the market this week in 5 auctions, up from 5.836Mt last week but still approximately half the volume of 14.806Mt the last week of July.
Price Action
Carbon emissions trading prices broke through the €8 level last week and the front December contract reached a high of €8.36 on Friday before closing the week at €8.33. The market gained 60 cents or 6.93% week-on-week. This movement was a result of market tightness, speculators and clean dark spreads. Last week saw the lowest auction supply this year at just under 6 million with cover ratios reflecting the market being well supported. However, trading volumes have remained relatively thin, with the largest volume day on Wednesday of over 11M/t once the front end December contract was above €8. It appears that speculators do not want to sell because they think prices are going higher and the reduced auction volumes in August supports this shorter supply and upward price trend. The Euro gained value against the USD making it cheaper for European generators to buy coal. In addition, last week saw historical lows for coal due to oversupply and weak demand. Russian data came out showing July exports at 13month high and this, combined with the broader weak energy complex, is not helping support coal prices. Since coal becomes the cheapest option for generators, this subsequently increases the demand for EUAs.
Price Impact: lower auction volumes have produced a positive impact on carbon prices and we are seeing the market rise due to this plus speculative buying. In addition, the clean dark spread has increased the demand for EUAs as coal in abundant supply and cheaper due to currency. The market risks to remain well supported this week among shortened auction calendar (see auction calendar below).
The MSR has passed all but one legislative hurdle, the last one is expected to be a formality and thus a fully operational MSR, reducing auction supply by 12% per year of the total over-supply, will come into effect in January 2019. You can read more about the MSR HERE.
Important MSR dates:
• 18th September – EU Environment Minister endorsement
The week ahead
Auction volumes remain restricted again this week and this tightness combined with speculators remains likely to support current price levels. Some profit taking might occur but any downward price movement risks to be bought by generators if coal continues to remain cheap.
