Market developments:
- Carbon price tumbles Friday as full auction schedule resumes
- Week closes at €4.09, a fall of 63c (13%)
- Price comes under pressure all week as traders position ahead of auction resumption
- Year low broken on Friday as prices briefly fall through €4.00
- China and USA ratify Paris agreement
- Carbon Forward 2016 conference: Redshaw Advisors’ 15% discount offer expires in 2 weeks
Auction Overview
- A full week of full auctions resumes in 5 auctions with 17.977Mt coming to market, up from just 3.495Mt last week.
- September’s auction volume goes back up to 69.1Mt
- See auction table below for more details.
EUA Price Action
Carbon prices tumbled last week amid sustained pressure throughout the week, likely from bearish speculators and some utilities. In our previous update we highlighted our bearish outlook and the likelihood speculators would position themselves ahead of the auction resumption, testing the resolve of the market. The week closed down 63c at €4.09, a fall of 13%. The price rally through August had underwhelmed and the clean dark spreads remained at record lows so the market looked vulnerable to a fall. Selling pressure didn’t let up throughout the week with prices lower each day, most notably Friday following the only auction of the week. The auction cleared a few cents below the market, which in itself is not unusual, however the auction was a barometer for not only the resolve of the shorts but also the current demand from utilities. With a very low bid total it was clear those trading short were not overly concerned about a price bounce and the utility demand was weak at best. To clear below market was a bad sign and prices tumbled to a 3-year low of €3.89 in the aftermath of the auction as first the year-to-date low of €4.28 was taken out and even the psychological barrier of €4.00. The oversold market staged a prompt recovery to €4.17. Utilities are by far and away the biggest natural buyers in the carbon market, however, following this year’s coal price rally and gas price falls it is now more or less cost effective to fuel-switch to cleaner forms of electricity generation. This reduces demand in the carbon market. The fuel switching scenario was first called by Energy Aspects last October and the result is a bearish outlook for carbon through much of the next 2 years. Price Impact: Gas is particularly cheap at the moment due to outages at the UK’s largest gas storage site, this isn’t expected to last as summer turns into Autumn and Winter and demand picks up naturally. Utilities are expected to return to business as usual unless the winter weather is particularly mild. However short term the chances of a price recovery caused by shorts closing and utilities resuming buying is low.
Redshaw Advisors are able to offer Energy Aspects carbon market research to all its customers. To speak to us about receiving the research please call us on +44 (0) 203 637 1055.
China and USA ratify the Paris agreement
The Paris agreement was formally ratified by China and USA this weekend making it likely the treaty will come into force this year. To become effective the treaty needs ratification from 55 nations accounting for at least 55% of global emissions, the addition of China and the USA to the list of nations who have already ratified it ensure a huge step is taken to reaching that target (25 countries representing 41% of emissions). This does not have a material impact on the EU ETS however the development means that the risk of carbon emissions being capped and costly are increasing for most companies. Understanding how that risk will evolve is increasingly important.
The week ahead
It is hard to see the upside for carbon at present. At some point the shorts will have to take profit and buy back, likely before October in case winter turns out to be cold, however, in the meantime if the utilities don’t step up and buy, carbon prices will come under further pressure as the auctions return to normal levels. Some support will come from industry as compliance buyers seek cheap carbon, however, this demand is unlikely to match the missing utility demand. This week we continue to be bearish albeit with a lot of the damage already inflicted on the market so falls may be limited for now. Longer term, fuel switching is forecast to continue apace after the winter and some early signs of changing utility behaviour (Uniper, the E-on spin off, have said they won’t long term hedge any more as detailed in our last update) both cause strong headwinds for carbon in the medium term. Add into the mix the end of backloading at the end of 2016, resulting in 200Mt more auction supply next year, and the outlook is for steadily lower prices subject to an unseasonal winter.
