Weekly carbon trading market update

Market developments

Carbon moves 9% higher to close the week at €5.41
32c added to the price on Thursday alone
Stronger underlying demand seen in auctions
Free EUA allocation distribution begins ahead of schedule
EU Council said to support doubled MSR withdrawal rate

EU Allowance Auction Overview

Back down to four auctions bringing ~17.3Mt to market, reduced from ~22.4Mt last week
Additional 7Mt to be auctioned in March compared to February (~86.3Mt v ~79.3Mt)

EUA Price Action

Prices surged higher last week as strong underlying demand was enough to see off the 5 auctions bringing more than 22Mt to market. The foundations for the move higher were laid in the strong auction results seen on Monday, Tuesday and Thursday as utilities and once a year compliance buying combined to boost demand. Aside from the strong auction showings, the week began as the previous one had ended with sideways EUA trading and muted volumes. The first 3 days of the week all closed within 5c of each other (€5.09/€5.04/€5.05) as the market tested both directions each day. The fundamentals suggested that carbon should have fallen last week with the bearish headwinds from 5 auctions, free allocation distribution and mild weather proving too much unless strategic and compliance buying could overcome the supply. High cover ratios in the Monday and Tuesday auctions supported our theory that some might buy more carbon because of the price supportive vote in Brussels last week. As we pointed out last week it is hard to say exactly where the extra demand is coming from and when it will stop but utility hedging cycles and once-a-year compliance buying are all contributing. The sideways EUA trading finally came to an end on Thursday as prices rose 32c to end the day at €5.37 following another strong auction. That day’s price rises were exacerbated by speculative shorts closing out positions as technical resistance gave way. Further gains on Friday looked likely but the intra-day rally was sold off in the afternoon as prices closed the day just a few cents higher at €5.41. Price Impact: with bearish pressure mounting the break to the upside was perhaps a little surprising. That said, it’s a busy time for once-a-year compliance buyers as their verification is finalised and they head straight to the carbon market.

Week ahead

A four-auction week increases the chance of further gains but the markets will likely also be a little thin due to two carbon related conferences taking place next week (Argus Emissions 2017 and the IATA / IETA International Aviation session in Geneva – Redshaw Advisors will attend both so please get in touch if you’re heading to either). All things being equal it looks like the best-case scenario next week is a move sideways, at worst the shorts send the market sharply upwards. A move down is unlikely but cannot be ruled out as the overall bearish picture for 2017 remains unchanged and speculators are on the lookout for levels at which to go short.

OTHER NEWS

EU Member States set to agree on doubled MSR withdrawal rate but auction share remains contentious

On-going discussions by environment ministers on the Phase IV EU ETS reform suggest wide member state support for the double Market Stability Reserve (MSR) withdrawal rate but the split between free allowances and auctions remains contentious. The next EU Council meeting takes place on 28th February and it is still hoped agreement can be reached ahead of the meeting so the reform proposal can move forward. Member states are keen to ensure the auction share does not fall too much whilst also protecting industry. Auction revenues go direct to the member states so any reduction in the auction share affect revenues directly. Other EU ETS strengthening measures have also been put forward with several states calling for a regular cancellation of allowances from the market stability reserve.