Two announcements last week helped resolve some minor uncertainty around the 2019 and 2020 EU ETS balances. The first was the late Wednesday announcement by the European Commission that the total number of allowances in circulation (TNAC) for 2018 was 1.65 Gt, largely the same as last year. The published TNAC determines the volume of EUAs that will be removed from the auction pots and put into the market stability reserve (MSR) over September 2019 to August 2020, which will be 397 Mt. We had been estimating that the MSR would remove 405 Mt of EUAs from auctions over that period, so a small adjustment needed to be made to our balances. The TNAC announcement was similar to the verified emissions data release on 1 April—an event noted by the market but not one to move prices, as we argued last week would be the case. The second announcement related to the amount of EUAs to be sold by the EEA EFTA countries of Norway, Iceland and Liechtenstein. The countries did not auction any allowances over 2013-2018, but now plan to release a combined 48 Mt of EUAs into the market. A previous announcement on 23 April from the European Commission stated that those EUAs would no longer be sold just in 2019. European Energy Exchange (EEX) published a revised auction calendar for 2019 last week, showing that 20.6 Mt of EUAs from these countries will be offered for sale during the rest of the year, starting in June. Another 28 Mt will be auctioned in 2020, a year when Poland may also sell derogated volumes, which we expect to amount to at least 50 Mt. In 2020, we expect more underlying upward price support. Additional auction volumes that year will just help moderate some of that tightness. The market was already expecting not all of the EEA EFTA volumes to arrive in 2019, so the news last week did little to move the market or change our balances, which had already been revised.
|Fig 1: EUA daily moves, €/t||Fig 2: 2019 auction calendar revised, Mt|
|Source: Refinitiv, Energy Aspects||Source: EU TL, Energy Aspects|
EU price action
EUA prices continued to explore the 24-28 €/t range in which prices have settled over the last few weeks, trading largely within the middle reaches of that range and posting within-day extremes of 24.8 €/t and 26.4 €/t. Brexit risk is still hovering over the market, as in April the risk was just kicked down the road to the end of October. A combination of local UK elections and polls for the forthcoming European Parliament elections indicate that voters are abandoning the two main parties historically, the Conservatives and Labour, in favour of parties more vocally committed to leaving the EU (the Brexit Party) or remaining (the Liberal Democrats and others). As a result, pressure within the Conservative party is growing to replace Prime Minister Theresa May. May has scheduled a fourth vote on her existing Brexit deal, in the week beginning 3 June and will then, regardless of the outcome, set a date for her departure. This will trigger a Conservative party leadership contest, which is likely to select a new prime minister who is more willing to contemplate a no-deal Brexit than May. Given this trajectory for UK politics over the coming months, market concerns about Brexit risk are only going to grow. Much like during Q1 19, such Brexit concerns are going to keep EUA price upside in check, reining in the desire of more speculative market participants to go long while such significant downside risk is still present. Outside of the big Brexit risk, the underlying fundamentals remain weak, with summer gas prices now more fully reflecting the scale of oversupply present in the European gas market. With the fuels complex weak, as coal demand has come under pressure because of low gas prices causing coal-to-gas fuel switching, another strong move to the upside seems unlikely. For this week, we expect more of the same in terms of EUA prices cycling around the 24-28 €/t range.