Next week's edition of Carbon weekly will be published on Tuesday 23 April, owing to the UK bank holiday.
EUA prices held onto the gains provided by the Brexit relief rally, closing Friday up by 8% w/w at 26.58 €/t, with the chaos of a no-deal Brexit avoided for now. A fractious EU eventually decided at an emergency summit on 11 April to provide the UK with an extension to the Article 50 deadline. The looming 12 April deadline, already extended from 29 March, was pushed back to 31 October. Yes, the show that is Brexit has at least another six months to run. While the EUA market continued to react with strength to the deadline extension, taking stock of what just happened suggests that while no-deal risk is temporarily gone, it is not off the table. The Brexit risks remain but have just been kicked down the road by a couple of quarters. It is true that the most likely outcome is now some sort of managed exit. For the EU ETS, 31 October is not a ‘clean’ date in terms of compliance. The EU ETS is now in a position where if the UK exits with no deal on 31 October, UK installations will not have compliance obligations for 2019. As such, it is unlikely that the UK will auction any EUAs or provide any free allocation EUAs before that date. In any scenario apart from no deal, UK installations will retain their compliance obligations under the EU ETS for 2019, through to the end of any transition period. Once a deal has been agreed between the EU and the UK, then the UK would proceed to allocate its free EUAs and would schedule its auctions. The lateness of the new Brexit deadline in the year does suggest that if there is an agreement on a deal in Q3 19 or later, the UK will be unlikely to offer all of its 2019 auction volumes during the remainder of 2019. Still, we do think that the UK might try to get all of its 2019 volumes sold by the end of Q1 20, in line with the 2019 compliance deadlines. The implication is that EUA supply could be low over the first three quarters of 2019, but supply from the UK could be reasonably heavy in Q4 19 and Q1 20, dampening upward price pressure.
|Fig 1: EUA daily moves, €/t||Fig 2: ICE EUA Options OI, Mt|
|Source: Refinitiv, Energy Aspects||Source: ICE, Energy Aspects|
EU price action
EUA prices continued to ride a technical bullish wave, with the break through the long-term resistance level at 25.7 €/t signalling to traders that more upside movement is likely. Prices saw no further gains on Friday (12 April), the day when the Brexit extension was finalised, suggesting that the initial momentum of the relief rally may have started to ease. The recent rise in prices did feed some self-sustaining upward momentum coming from short-covering that the move caused and further delta hedging on calls (there is 107 Mt of open interest in calls with a strike price between 24-30 €/t on ICE). Some late compliance buying added support to fundamentals. The fuels complex which had otherwise been so bearish recently, with gains in gas prices in the previous week initially outpacing those in the carbon and coal markets. Gas was buoyed by actually being more structurally bearish than carbon, as it made short-covering in gas that much more intense as gas followed carbon upwards. Over last week, gas prices started to ease, removing some of that upside impetus for the carbon market. With the short cold spell in Europe also starting to ease, any supportive underlying fundamentals are starting to disappear. So, this week does feel like a big test for the EUA market, with some profit taking possibly augmenting less supportive fundamentals, which could put pressure on the market to retrace some of the gains of the past two weeks. Last, the EC did let out last week that the 450 Mt to be sold in the next phase as part of the Innovation fund would be more likely evenly spread across the phase than front loaded. While nominally bullish 2021 delivery, we do not expect it will significantly support prices right now, although it could feed general bullish sentiment over the start of the next phase.