Market Development
- Price consolidated through week but dropped Friday afternoon closing the week down 1.44%
- An intraweek high of €8.43
- Strong auctions help prices reach 33 month highs
- Clean dark spreads remained healthy as falling power prices were more than offset by coal drops
- Worries over Chinese economy fuel drops in all markets including the wider commodity markets
Auction Overview
- 5.976Mt enters the market this week. Last week of reduced auction volume as Tuesday 1st September heralds the return to full auction volume.
- 12.157Mt comes to market next week, no auction on Monday.
Price Action
Carbon prices advanced further intraweek to hit a new 33 month high of €8.43 on the front December contract before falling back on Friday to settle the week down 12c at €8.21. The small rise midweek was caused by some well supported lower volume auctions. In particular the Wednesday ICE auction cleared several cents above the market. The auctions normally clear slightly below market so a strong auction is a bullish signal to participants that underlying demand is outstripping supply. Trade press reported discussion amongst traders that thin volume was allowing speculators to unsustainably boost prices considering September’s ‘normal’ auction volumes returning soon. This sentiment, when combined with weakening global markets, made some kind of sell-off inevitable and carbon closed the week down. Certainly with one eye on the auction volumes, which return to normal volumes from 1st September, and the other on China it is likely traders saw little room for further gains. With that all said, EUA carbon trading correlates poorly with global markets and with strong clean dark spreads (power price falls were more than offset by the falling coal price, exacerbated by a strong Euro) and another week of reduced auctions should add up to reasonably well supported market.
Price Impact: Carbon price is well supported by the fundamentals; a strong Euro making coal prices weak in Euro terms and continued reduced auction supply. Due to global market meltdown and the prospect of restored auction supply being only a week away speculators with long positions will be out of the market by now, a little bit earlier than planned. Consequently the fundamentals are restored and we can probably expect, subject to those fundamentals remaining in place, some carbon price recovery this week (capped by last weeks highs).
Market Stability Reserve (MSR)
The MSR has passed all but one legislative hurdle, the last one is expected to be a formality and thus a fully operational MSR, reducing auction supply by 12% per year of the total over-supply, will come into effect in January 2019. You can read more about the MSR here. Important MSR dates:
- 18th September – EU Environment Minister endorsement
The week ahead
With lower auction volumes coming to an end and fears over the global economy the carbon prices rises may be limited in the short term, however, 2015 remains forecast to be the ‘shortest’ (demand outstrips supply) year for the carbon market through the backloading period and further prices rises through H2 2015 and beyond seem more real to buyers now. The Euro is also very strong against the Pound so UK firms are not seeing the benefit of Friday’s carbon price drop.
