Market developments
- Carbon advanced 22c (4%) last week following a bullish Council position on Phase IV reform
- Prices hit high of €6.02 on Thursday morning
- Volatile week as politics in carbon trading driving seat
- Council position contains more ambition than expected
EU Allowance Auction Overview
- Five auctions bring ~21.5Mt to market, up from ~17.3Mt last week
- UK auction volume back to normal following 4 larger-than-normal auctions
- Additional 7Mt to be auctioned in March compared to February (~86.3Mt v ~79.3Mt)
EUA Price Action
Phase IV reform was the major driving force last week as the Council, made up of member state environment ministers, agreed a more ambitious position than expected. The doubled MSR intake rate proposed by the EU Parliament survived and ministers beefed up the EUA cancellation plans. You can read our full review of the Council position here. In reaction to the higher than expected ambition the proposal sent carbon trading prices 68c higher on Wednesday following the agreement late Tuesday evening. The move higher was exacerbated by stop losses being triggered on a day coincidentally lacking a daily auction. Prices managed to hit €6.02 on Thursday morning before sense prevailed and buyers realised the rises were panic driven and as speculators saw a good opportunity to go short. Although ambitious, the reform proposals do not affect demand or supply in the short-term and consequently the true impact on prices is unlikely to be felt before H2 2018. The start of the week and run up to the Council meeting was subdued and prices ground lower over the course of Monday and Tuesday on rumours the Council would likely struggle to reach agreement. News of an agreement broke late Tuesday evening (about 5 minutes before the market closed) and started the move higher at the tail end of the day. Friday was calmer as prices stabilised around €5.50, ending the day slightly higher on rumours of a large scale industrial buyer, to close the week at €5.63, a 4% gain week-on-week. Clean Dark Spreads developments were unexciting and gas moved a little lower, in part caused by a storage outage being extended to July. Price Impact: the big carbon trading move on Wednesday pushed carbon above all technical resistance levels and they now become support so believers of such analysis got involved and got burnt. Short to medium term fundamentals haven’t shifted so a carbon trading move based so strongly on sentiment and short covering may just as quickly get reversed.
Week ahead
Last week the market saw very high volatility with a huge climb on Wednesday and then a fall nearly as large on Thursday. Of potential significance, Thursday’s reversal did not manage to take back all the previous day’s gains and coupled with Friday’s upward price action, would suggest that support is out there on the buy side. Anecdotally the carbon market knows that industrial buying is waiting in the wings for either a price drop or the April 30th deadline. Quite how much is the big question. The known fundamentals are bearish (5 auctions, warm, wet & windy weather and free allocations being issued) so absent a rally caused by pent-up short term underlying demand we are neutral to bearish.
OTHER NEWS
Council unexpectedly increases ambition of Phase IV reform
The Council of the European Union adopted a position on the Phase IV reform file that included a measure that will dynamically cancel volumes held in the MSR, unexpectedly increasing the long-term ambition of the reform. Negotiations went on until late in the day but agreement was reached with those in favour of the proposal totalling more than 70% of the EU’s population, enough for the proposal to pass under new voting rules. The most notable objections came from Italy and Poland, however our sources tell us that Italy were objecting to procedural issues and will support the measure in the final vote.
The EU Council position key points are;
- Regular cancellations of surplus allowances in the market stability reserve (MSR), rather than a one-off cancellation put forward by the EU parliament. According to EU ETS lobby group Sandbag this could lead to a massive 3 billion tonnes being cancelled over Phase IV.
- Doubled intake rate for the MSR for the first 5 years of operation (4 years only has been widely reported)
- A 2% flexibility mechanism to increase the available allowances for free allocations in the event the CSCF is triggered. The EU Parliament had proposed 5%.
You can read a summary of last week’s agreement in our article here.
