European carbon

Published at 12:07 29 Apr 2019 by

Next week's Carbon Weekly will be published on Tuesday 7 May, owing to the UK bank holiday.

Just when it looked like the EUA market was going to settle into a new range, technicals kicked-in and prices dropped. Over most of last week, the market traded in a tightening range around 27.4 €/t. That was before Friday, when the week-long failure to break above 27.85 €/t led to testing of the downside and a price fall to 25.8 €/t. While it is tempting to look for some fundamental reasons for the 5.2% d/d drop, this move is likely to be all about the failure of prices to move any higher, eventually signalling a day for profit-taking. It is true that last-minute compliance buying is likely to be over, with the 1 May compliance deadline in sight, although it seems fanciful to assume such purchases just came to an end on Friday. Distressed purchases from British Steel could still take place over the first two days of this week. However, few companies will likely have left purchases to so late in the compliance calendar. The move down confirms our expectation that the early April jump in EUA prices was a mix of shorter-term volatility traders going long and longer-term buy-and-holds coming into the market. The important question is what does this mean for price direction going forward? There is a lot of technical support at 23.2 €/t, so the market could test prices that low, but a move below that would be a very bearish signal. The fundamentals are still mixed. Q1 19 power emissions look low after that warmer-than-usual quarter, and high wind and nuclear generation, and this looks to be followed by a similarly modest Q2 19. The fundamentals at the TTF are still bearish and, after a bit of a transitory short-squeeze in early April due in large part to following carbon up, prices at the gas hub have tumbled again in relative terms. The gas market will require more power sector gas burn to balance in summer 2019, so we expect a sizeable drop in power sector emissions, of over 40 Mt y/y in 2019.  

Fig 1: EUA daily moves, €/t Fig 2: ICE EUA Options OI, Mt
Source: Refinitiv, Energy Aspects Source: ICE, Energy Aspects

EU price action

We argued last week that we did not see obvious current fundamental triggers to push the market in either direction, although we highlighted upside resistance at 27.85 €/t. A failure to break through that resistance level led traders to look for profit as it signaled that run up in prices was largely over. The mid-April hot spell has finished and the latest temperature forecasts are a bit more constructive for EUA demand, with temperatures set to be below normal in the first part of May. Alpine hydro balances have risen a little, but remain well down in y/y terms, while Nordic balances are down less in y/y terms but are still below normal. Across these two key regions, we see hydro availability as a supportive development for EUA prices at the margin, but it will unlikely be enough to offset the general drop in thermal generation demand that we expect over summer 2019. The expiry of Jun-19 options is on the horizon. ICE Jun-19 options have 30.5 Mt of open interest (OI) on calls and 47.1 Mt of OI on puts, making it the only expiry in which the market is biased to puts. In terms of calls in the money, there is 11.4 Mt at strikes at 25 €/t or below. In terms of puts, there is only 4.8 Mt at strikes at 25 €/t or above. Across the calls and puts, the volumes are unlikely to have a big impact on the underlying EUA market come expiry on 19 June. Total option OI on ICE over the last three weeks has increasingly seen the market look for downside protection. OI in calls on ICE has risen by 30.2 Mt over the last three weeks, while OI in puts is up by 51.5 Mt. While the total option market is still biased to calls (59% of total OI), the last few weeks suggest the market is eyeing more downside once prices get above 27 €/t. We continue to expect EUAs to stay in a 24-28 €/t range for the coming few weeks, as we did last week.

 

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