Weekly carbon trading update – 24th April, 2017

Market developments

  • Friday sell off pushes carbon down to €4.56, a fall of 40c (8%).
  • Price falls every day last week
  • New 2017 low set at €4.56
  • Falling carbon combined with stronger Euro help clean dark spreads higher
  • Compliance deadline this Friday! If you’ve not made your registry transfer yet make use of our registry shortcuts

EU Allowance Auction Overview

  • Auction volume increases to ~22.1Mt from ~17.3Mt last week
  • April brings 78.5Mt to market, down from 92Mt in March.

EUA Price Action

Carbon prices tumbled last week, somewhat unexpectedly, as last minute compliance buying failed to provide enough support and a lower auction week still provided more than enough supply. The Easter holidays led to muted carbon trading for much of the week with tight trading ranges and uninspiring volumes. Each day carbon tried but ultimately failed to go higher with a sell off every afternoon taking the price lower and setting a bearish tone for the next day. This pattern repeated and carbon closed down on all four days, setting a new year-to-date low at €4.56 on Friday in the process. The falls accelerated on Friday as carbon shed 18c to close the week down 40c (-8%). The sell-off, despite healthy clean dark spreads, was likely due to a combination of a full auction week this week, the (slim) chance of a Le Pen victory in the French primaries and perhaps the first major short seller brave enough to break ranks and call the end of last-minute compliance buying. Certainly, the chance of a price spike, similar to that witnessed last year, has faded and given the bearish fundamentals this year, carbon looks vulnerable to further falls. Some support may be found from the utilities due to the clean dark spreads strengthening slightly last week as a strong Euro and tumbling carbon increased the incentive to hedge future years. Price Impact: price action so far this April demonstrates how last minute compliance buying is a minefield. Last year, prices spiked by more than €1.50 into the deadline, this year it is struggling to stay near €5.00. The lack of upside for carbon through the first, and highest demand, four months of the year are symptomatic of an oversupplied carbon market. The supply-demand balance is only set to get worse over the months ahead.

 

Week ahead

The end of the compliance window also precedes the start of a period of relatively weak carbon fundamentals as auction volumes remain high but temperatures are rising as we get closer to the summer. However, this week could still give us a small anomaly, there is a cold snap coming to parts of Europe and there are pockets of compliance buying dotted around Europe.  Hydro levels are also stubbornly low. However, last week’s EUA price weakness increasingly reinforces the view that carbon will come under real pressure in the coming months. That pressure may be avoided this week as the deadline forces the last of the buying out the woodwork but whatever compliance buying there is will be absent from the market next week.

Based on the balance of probabilities we have a bearish outlook for the week, in particular Friday’s close, but with the chance of some support between now and then we cannot completely rule out some kind of price spike, afterall total remaining buying interest is unknown. Check out our blog on April price development, available in full here.

Other News

UK looking at alternatives to the EU ETS

As part of the Brexit process, the UK government are looking into alternatives to the EU ETS. No decisions are thought to have been taken with the work purely, currently, concentrating on analysing the UK’s options.

The main contenders are to carry on in the EU ETS, an enhanced domestic tax (the Climate Change Levy already taxes carbon at a relatively low level, though higher than current EUA prices) or the creation of the UK’s own ETS, possibly with a link to the EU ETS.

As one of the more ambitious member states in the EU ETS and one of the target ‘over-achievers’, it is likely most EU member states will want the UK to remain part of the EU ETS. However, this option would mean the UK had no say in the future rules and regulations of the ETS it participates in, a position it is unlikely to want to find itself in.

 

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