Market developments
- Prices continue to climb, ending the week 7% higher at €5.19
- Friday sees largest move higher as €5.00 ‘cap’ finally succumbs to buying pressure.
- Weekly close at the high sets bullish tone
- Clean Dark Spreads (CDS) relinquish some of the recent gains.
EU Allowance Auction Overview
- Auction volume increases to 17.3Mt this week from 13.38Mt last week
- June auction volume similar to May (~83Mt) as public holidays continue to fragment auction calendar
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EUA Price Action
Carbon continued its move higher last week, closing at €5.19 for a 7% week-on-week gain. The majority of the gains came on Friday, as the auction hiatus left the market short on the week. Following on from the previous week prices continued higher on Monday and hit €5 for the first time since April, buoyed by a strong auction. The move higher faltered on Tuesday as a weaker auction price and profit taking combined to push prices to the low of the week at €4.72. Much of the remainder of the week saw carbon slowly clawing its way higher again before Friday’s 20c break out, above the psychological €5.00 barrier. The picture from wider energy markets was mixed as power prices rose week-on-week but could not keep pace with carbon so the clean dark spreads relinquished some of their recent gains. That said, the CDS are still not far from the year to date highs so utility hedging is certainly creating the strong underlying demand. Price Impact: it is hard to tell whether Fridays gains are the result of hedging or speculator activity but the close at the high sets a bullish tone coming into this week.
Week ahead
Another week fragmented by public holidays means auction volume again remains relatively low but more EUAs come to market which presumably takes off some of the buying pressure. A small drop off in the clean dark spreads also indicates some of the froth may come out of the market. Some carbon traders will have an eye on the six weeks from the middle of June until the end of July that feature an auction every day and a total of ~135.2Mt will enter the market. That volume will soundly test the resolve of the market in the face of high supply and potentially waning demand. However, this week the utilities, guided by the generation spreads, hold the key to price direction. Fundamentals seem flat to bearish, however a close at the high last week can’t be ignored so sends mixed messages. We are therefore neutral with a chance of further upside but these relatively high prices make shorting in anticipation of increasing supply more attractive so the size of any moves higher will be tempered by speculators casting an eye forward.
Window of opportunity? The compliance deadline is out of the way for everyone for another year but the real carbon risk, MSR-induced price change, doesn’t go away so conveniently. The medium-term outlook for carbon prices is bleak but Energy Aspects’ longer term forecasts tell us that they are set to move substantially higher. To discuss your exposure and how we can help you get on top of it before the market reacts to the MSR’s start in January 2019, feel free to get in touch: info@redshawadvisors.com
Other News
Utility hedge ratios lower than in previous years.
Analysis by Argus Media has suggested many of Europe utilities are behind on their usual forward hedging ratio’s, providing a possible bullish influence for carbon if utilities are forced to play ‘catch up’ over the remainder of the year.
However, if the change is part of a long-term shift in focus by the utilities as they reign in the traditional 3 year hedging window to a shorter-term strategy the impact may be bearish as less carbon allowances are needed by the utilities.
IETA members believe an EU ETS Price floor is needed
The majority of the International Emissions Trading Association (IETA) members believe an EU ETS price floor is needed to provide a meaningful price. As part of a survey conducted by PwC on behalf of IETA, 35% of respondents believed that a price floor is needed with a further 25% strongly agreeing one should be implemented.
The calls for a price floor have been led by France and as yet have gained little traction, however, continued low EU ETS prices is likely to strengthen calls for some form of intervention.
Carbon Forward is back and Redshaw Advisors announced as official partner
Redshaw Advisors are pleased to announce that we will once again be the official conference partner and training day provider for the annual Carbon Forward conference to be held in London on 26th-28th September 2017. The conference will give carbon market participants from all over the world a greater understanding of the risks and opportunities they face in ever-changing carbon trading, regulation and taxation.
Brexit, the ‘Trump factor’, an ambitious Phase IV reform package, the Chinese ETS launch in 2017 and the development of a global offsetting system for the aviation industry mean carbon risk is higher than ever. To successfully manage this risk companies need a thorough understanding of how carbon markets and regulation across the globe affect them and their competitors, Carbon Forward is designed to provide that understanding.
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