Market Developments
- As we suggested the week closed down, losing 30c.
- Prices teetering on the edge of key support level at €5.65
- Downward pressure comes from high auction volume, falling oil price and Brexit fears
- Clean dark spreads remain relatively unchanged week-on-week due to stronger coal and power
- We discuss the impact on the EU carbon market of a vote to leave in our ‘Brexit’ blog
Auction Overview
- 18.178Mt comes to market in 5 auctions, higher than last week (17.260Mt) due to increased volume in the Polish auction on Wednesday.
- June auctions bring ~72.5Mt EUAs to market, a marked increase on ~56Mt in May.
- July brings a further ~70Mt to market before volume falls to ~21.5Mt in August due to the European holiday season
- See auction table below for more details.
EUA Price Action
EUA prices fell 30c last week as a cocktail of high auction volume, falling oil prices and Brexit fears weighed heavily on the market. Over the last few weeks we have highlighted the risk of EUA price falls and last week, with the higher auction volumes, fundamentals finally caught up with the theory. With a weekly trading range of 30c the price action was mostly one way and the Friday close at €5.67 leaves carbon open to further large falls should key support at €5.65 be broken. Carbon appeared to be under pressure the whole week as prices failed to test the upper €6.00 level throughout. The largest fall occurred on Thursday as oil prices slid and took most of the energy complex with it, save for coal and power. Both power and coal prices enjoyed positive weeks with the clean dark spreads remaining unchanged week-on-week, the large coal gains were compensated for by falling carbon and rising power prices. Price impact: both auction supply and external market pressures weighed heavily on carbon last week to cause a test of the bottom of recent months’ trading range. That we had to wait for higher auction volume to hit the market before prices could fall is consistent with the market being flat to overall slightly short. The next 2 weeks of full auctions will test the downside thoroughly, only the expectation of far lower August volumes will save price from July’s additional onslaught of auction volume. Even with a positive ‘remain’ vote in the UK we are bearish in the short term.
Brexit: the impact on carbon price, the EU ETS and beyond
The UK’s referendum on whether to leave the EU on the 23rd June has many unknown impacts but in the carbon trading community, that is largely based in London, the impact of a Brexit on the EU ETS and carbon prices has everyone trying to guess what will happen next. The question we have been asked the most in recent months is: how will our EU ETS exposure be affected by a Brexit? Understanding this risk is key to managing carbon exposure but exactly how to manage it very much depends on an individual company’s circumstances. To read our analysis please click here.
The week ahead
Much will depend on the tone set Monday as carbon prices closed last week just 2c higher than the key support at €5.65. Auction volumes will continue to test market demand and the Brexit vote on Thursday will likely lead to some short term volatility. If the UK votes to leave the EU we expect prices to fall straight through the support at €5.65 and material short term falls are likely. We believe there is likely some short positioning ahead of the vote due to the negative impacts of a Brexit, as discussed in our analysis above. It is hard to say exactly how much volume may be backing a Brexit and the impact it may have but in the event of a remain vote there may be some short position reversal. However even in the event of a remain vote we expect soft carbon prices with the target to overcome on the upside at €6.00. As usual, other factors can have a short term influence, so much will also depend on the ability of power prices to keep up with coals’ recent meteoric rise to keep the clean dark spreads at current levels.
