Market developments:
- Small fall in the carbon price as week closes down 6c at €4.72
- Early price action saw prices rise to €4.95. Tuesday afternoon sell off pushed prices back down
- Lack of price appreciation despite low auction supply
- Clean dark spreads retreat towards record lows through the week
- Uniper set to change hedging strategy in move that adds more pressure to carbon prices
- Carbon Forward 2016 conference: Redshaw Advisors secure 15% discount for our carbon weekly subscribers
Auction Overview
- Auction supply more or less the same at 3.495Mt this week in just 1 auction on Friday.
- Final week of reduced auction supply as September brings return to normal volumes with 17.976Mt next week
- Volume goes back up to 69.1Mt in September
- See auction table below for more details.
EUA Price Action
A small drop in the carbon price of 6c in a week of very low auction volumes demonstrates buyer apathy towards carbon at present as clean dark spreads, Brexit uncertainty and the holiday season continue to dog the market. The week began with a continuation of the recovery formed the previous week. Prices moved up on Monday closing the day at €4.91 and Tuesday morning saw further gains to the high of €4.95. €5 looked to be the target, however, a failure to climb any higher led to a sell off as speculators took profits and exited ‘long August’ strategies. Prices have traded through €5 on two occasions since the Brexit vote, other attempts have fallen short each time followed by a sell-off. A daily close above €5 has not been seen since the Brexit vote back in June so €5.00 is increasingly looking like a substantial hurdle to higher prices. Sideways tracking since Tuesday tells us that there is little weight behind moves up or down at present as the thin market conditions and holiday season combine to leave traders unwilling to take large positions. The clean dark spreads suffered again last week as Euro denominated coal prices climbed, exacerbated by a tumbling EUR/USD rate thanks to the increasing prospect of a USD interest rate hike. The week closed quietly and re-opened on a UK holiday yesterday in the same manner, volumes were similarly muted. Price Impact: carbon has traded in a relatively tight 59c range through the whole of August but the €4.72 close on Friday still represents a monthly gain of 6.5% so far. In light of the lower than usual August auction schedule bigger gains may have been expected, the storm clouds of September’s ‘normal’ auction volumes are gathering…. We are bearish.
Uniper set to change hedging strategy in move that adds more pressure to carbon prices
Uniper, the German utility spun off from E-on, is set to change the way it hedges its German fossil fired power according to a report by Argus. It will move away from the conventional 3-year hedging strategy towards a short term outlook in light of the current unfavourable conditions. Uniper inherited a well hedged power portfolio from E-on with hedging for the coming 3 calendar years above historical averages. The move to a shorter term strategy will add more pressure to carbon prices as demand is reduced with no corresponding reduction in supply. The impact will be fairly minimal with Uniper’s fossil fueled generation assets in Germany reduced in recent years by closures and mothballed plants, however, it possibly signals a shift in the way utilities across Europe will hedge. A move by other utilities with larger fossil fueled power generation portfolios across Europe to shorter term hedging schedules would have a huge impact on the carbon price over the coming years and indeed the ability of the Market Stability Reserve to soak up the additional supply.
The week ahead
The utilities will hold the key to September price evolution but the coming week might be influenced by short positioning ahead of the return to full auction volumes. Just one auction this week on Friday could well precipitate a drop from Wednesday or Thursday onwards. As much of Europe slowly emerges from the holiday season and gets back to business, utility behavior will be key to the direction of the market in the coming weeks. In light of the record low clean dark spreads and signs of utilities backing away from hedging generally, unless the utilities have stored up buying requirements until September, we expect ongoing price weakness. Alternatively, August power hedging may have been deferred in light of the low clean dark spreads in the hope they would improve and the utilities now enter ‘catch up’ mode (when they become forced to hedge almost regardless of CDS levels). We think the most likely market reaction is a downward move. The redistributed auction volume from the August cancellations will increase weekly auction volumes from 5th September and add that little bit more pressure on the carbon price. It is increasingly likely that only a cold winter can save carbon prices from a further material drop.
