The EUA market feels like it is settling into a new trading range, with prices currently in the middle of 24-28 €/t. A notable feature of trading over the last few weeks—during which there has been a sharp move up at the start of April, followed by a downward correction—is that the contango in the curve has consistently narrowed. Before the price move up, the contango in the Dec-19-Dec-22 spread provided an implied rate of carry of 2.0% per annum. At Friday’s close (3 May), that rate was down to an implied 1.4% per annum. One potential explanation for that sharp drop in contango is that current speculative activity was more focused on the more-prompt contracts than the further dated contracts as the market was being bid up. Still, the contango has not widened back out as the market has dropped. Alternatively, this may point to market participants stepping up repo activity—buying the front end and selling the back end to lock in the cost of carry. The implied repo rate peaked at an annualised 2.6% in mid-February. That high carry rate, on what is a low-risk trade, should have brought some new capital into the market. The reason those annualised carry rates increased as much as they did was likely because of the phase break that will take place between 2020 and 2021. While EUAs are fully bankable between phases, it does take new participants a while to get comfortable with what is perceived as a potential phase on phase risk. What the repo will have done is added some underlying support to the prompt, while helping to bring down the relative price of the further-dated contracts. Over April, Euribor has become slightly less negative, with its limited move actually moderately supportive of the Dec-19-Dec-22 spread. Apart from repo activity, the EUA market continues to look like it is trading fairly technical, with key downside support at 23.3 €/t. We continue to expect EUAs to stay in a 24-28 €/t range for the next few weeks.
|Fig 1: EUA daily moves, €/t||Fig 2: EUA cost of carry along the curve, %|
|Source: Refinitiv, Energy Aspects||Note: Shows implicit rate of interest between front-year and specified contract.
Source: ICE, Energy Aspects
EU price action
Technical trading continues to dictate daily volatility as fundamentals are not providing much support. On 2 May, the European Commission published installation compliance data for 2018, showing that less than 2% of installations were non-compliant. This is slightly lower y/y, but really has little implication for the market. It is possible the non-compliant installations will cover their shorts at some time in the future, but this will depend on enforcement by EU countries and the status of the installations, as installations that have closed since the start of 2019 may be unlikely to worry about 2018 compliance. On a more supportive note for EUA fundamentals, there were indications in late April that the European Economic Area (EEA) European Free Trade Association (EFTA) countries—Norway, Iceland and Liechtenstein—in the EU ETS will spread out their auction volumes over a longer period. These states have yet to auction EUAs for calendar years 2013–2018. These EUAs are to now be auctioned in 2019 and 2020, rather than just in 2019. The countries are likely to auction their 2019 and 2020 auction volumes at the same time. Norway announced that it was planning to auction 46.8 Mt (around 7.8 Mtpa) to cover the period 2013-2018, with Iceland and Liechtenstein accounting for around a combined 1 Mtpa. We expect that the volumes will largely be evenly split on a monthly basis for the period from July 2019 to December 2020 when EEX publishes the auction calendar, which is expected to be soon. The news was moderately bullish 2019, albeit bearish 2020. Some reports suggested that carbon followed gas down last week. We find it hard to believe last week’s modest TTF moves had a big impact on dispatch or hedging on the power curve, or that the EUA market—which still has almost a year’s worth of surplus inventory—is that attuned to fuel switching. If the EUA market is trading on the TTF, then any price upside can be ruled out for this summer.