It is going to be another big week for risk around Brexit in the European carbon market. A second vote in the UK parliament is scheduled for Tuesday (12 March) on what looks to be a largely unmodified version of prime minister Theresa May’s Brexit deal that was defeated by a margin of 230 votes in December 2018. We think the prospect of the deal being approved by parliament on Tuesday is slim, but the market will largely be anticipating this outcome so price action on that vote should be limited. If the deal is rejected, there would then be a vote on leaving the EU with no deal, which we expect will fail to pass as there is little support in parliament for such a potentially disruptive outcome. On that latter vote, EUAs could rally slightly as it would effectively take a no-deal Brexit off the table for a while, but any price move would be limited as such an outcome is largely expected. The last of the three votes, on Thursday, would then be to approach the EU to extend the Brexit (Article 50) deadline from 29 March, which is the most likely vote to pass. Again, we think this outcome would have been priced in already, so EUAs are unlikely to jump much higher. At this point, we do lurch back into uncertainty. The length of the deadline extension is up to the EU, and the EU believes that this extension should only happen once, with France reportedly suggesting an extension of up to two years. If such a long extension is agreed, the EUA market would see no-deal Brexit risk off the table for a lengthy period and that could pave the way for some more speculative capital to come back into this market. However, EU elections are in June and the new parliament will be sitting as early as July, so there would be legal issues with the UK not having any EU parliamentary representation despite still being a member of the bloc. Such concerns might drive a shorter extension, until the end of June, for example. If that occurs, then the EUA market would still be facing the possibility of a no-deal Brexit, in June, which would be a signal for the prices to drop to a lower range.
|Fig 1: Option OI on ICE, Mt||Fig 2: EUA daily trading ranges, €/t|
|Source: ICE, Energy Aspects||Source: Refinitiv, Energy Aspects|
EU price action
Any clarity on how long the Brexit deadline might be extended is unlikely this week as the UK government has to go to Brussels to request an extension and the EU has to agree that it wants to grant it and, if so, for how long. The EUA market spent all of last week establishing itself in a new, higher range. Dec-19 closed Friday at 23.0 €/t, up by 3.3% w/w, courtesy of the announcement of the UK’s votes on Brexit in the previous week. We think EUA prices are likely to stay in that higher range, at least until the length of the potential extension to the deadline is known. We still think technical resistance to the upside will be at 24.2 €/t, while downside support could lurk around 21.7 €/t and then, if it went through that, at 18.4 €/t. Given we think that rejections of the first two Brexit votes this week will be viewed positively by the market, prices are more likely to test the top of the range than the bottom. Any indication of only a short extension being granted by the EU will drive prices towards the low end of that range, holding out the promise of volatile weeks ahead. The fundamentals are mixed, with UK installation annual compliance deadline this week maybe adding in some late buying, although that is likely to be limited so close to the deadline. Fuel switch economics have continued to head in gas’s favour on an extremely soft gas market, that has seen gas continue to price itself downwards in relative terms to coal. Over the coming summer, we expect that relative softness in gas prices to continue, driving down utilities’ compliance needs for EUAs.