Market developments
- EUAs slip 13 cents lower to end the week at €4.45
- New low at €4.29 set intra-week (1c lower than last week’s low)
- Clean dark spreads remain strong.
EU Allowance Auction Overview
- Auction volume goes down slightly this week to ~21.5Mt but next week drops to: ~13.4Mt
- May brings 82.8Mt to market, up from 78.5Mt in April
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EUA Price Action
EUA prices ended the week slightly down as the supportive buying interest was insufficient to cope with such a full week of auctions. Next week could be a different story. The week started off badly, giving up all of the previous Thursday and Friday gains, presumably demonstrating that the buying interest was transitory. Prices spent the rest of the week in negative territory, setting a new year-to-date low on Friday thanks to a particularly weak auction before recovering 16c to end the week at €4.45. Auctions were not well supported last week despite clean dark spreads being strong throughout. Clean dark spreads actually weakened on Friday so fundamentals did not play a role in that day’s partial price recovery. We expect speculators closing short-term short positions ahead of the weekend provided Friday’s buying interest. This week’s auction quantities are more or less the same as last week’s so at first glance it seems that we can expect more of the same this week. Price Impact: despite bearish signals coming from the levels of auction coverage (1.43 cover ratio compared with a year to date average just above 2.6) the market is holding up for now. Strong clean dark spreads, in turn likely to be a consequence of continued nuclear outages in France and generally low hydro levels, are clearly providing some support from the buy-side.
Week ahead
Five auctions will again ensure that the market is well supplied this week. However, continued high clean dark spread levels combined with a much reduced auction schedule next week, caused by Ascension Day, will do a lot to offset negative sentiment for now. The low cover ratios for the auctions this week are an ominous sign that there isn’t a great deal of interest in buying the carbon that is being made available, even with current supportive factors. As the months progress it is difficult to see where continued support and any chance of upward pressure can come from. However, if clean dark spreads remain at current levels then, in the short term, next week’s reduced auction schedule may well provide enough support for a small upward move this week.
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
Analyst update: Firmer prices and EUAs at €35 by 2024…
Energy Aspects cite prolonged nuclear outages that have in turn caused hydro stocks to be run down as the reasons behind their slightly less bearish outlook for Q2 average prices. They now expect €4.50 per EUA during the quarter.
At a meeting last week in Brussels, analysts ICIS Heren are expecting EUA prices as high as €35 by 2024 in response to the implementation of a beefed-up Market Stability Reserve (MSR) from January 2019. ICIS further expect EUAs to come out of their bearish phase around mid-2018.
The European Commission publish their calculation of excess EUAs
As a warm-up to the implementation of the MSR the European Commission have published their calculation of the number of EUAs in the system that are not required for compliance. They calculate the excess by comparing the number of EUAs issued (for free to industry or for sale in government auctions) with the number relinquished for compliance. Their calculation shows that the EU ETS is running a surplus of 1.69 billion EUAs. That amount is roughly equivalent to a year’s emissions from the installations covered by the EU ETS. This tells us that if the MSR were in operation today the number of EUAs that would be removed from auctions this year would be 203M and in the case of a doubled withdrawal rate (to 24%, as proposed by the EU Parliament and Council of Ministers) would be 406M.
The Commission will next calculate the excess EUA value on May 15, 2018. This number will be used to determine the reduction in auction volumes from January 2019. The calculated excess is expected to be slightly higher than this year’s due to emissions expected to be lower than the sum of free allocations and auctions in 2017.
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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