EUAs likely to test higher levels this month amid volatility
03 July 2020 | Trading
EU carbon prices could extend their three-month rally into July as bullish technical factors show few signs of easing, though traders are on high alert for any signs of a reversal.
The short-term optimism is backed up by longer-term factors such as wide-ranging reforms of the European Union ETS under the EU’s Green Deal, sources said.
“All the signals show that over the [next few years] there will be less free allocation and more demand for EUAs,” said Eliot Tabet, an analyst at Sandbag. “This is keeping the market firm.”
The benchmark Dec 20 EUA contract reached a six-month high of EUR 27.23/t in June and ended the month at EUR 26.97/t on Ice Futures. That 26% rise from the end of May is the biggest month-on-month gain since March 2018.
The contract last traded 0.6% lower at EUR 26.80/t.
Continuing optimism over the economic outlook is also a factor, said Yan Qin of Refinitiv.
“The upward momentum in carbon is quite strong and may as well extend into July, underpinned by optimism over the economic recovery.”
Many sources see speculative traders as the main driver of the market’s uptrend, though some also question whether some degree of compliance buying is also helping to keep the market firm.
High auction supply
July sees the highest auction supply since November 2018, with Ice Futures and EEX scheduled to sell more than 74m EUAs. However, sources suggested that the increased supply may not make much difference to the market.
“June supply was 12m tonnes higher than May and [the market] still gained 25%,” said one trader.
Participants expect some price volatility as the market rises towards the EUR 30/t level.
“At prices over EUR 30, trading would become very volatile because it would be a new price regime, but any pullback would be volatile too,” said one London-based trader.
Power supply risks
Fundamental factors are likely to play a role in July, according to Refinitiv’s Qin.
“French nuclear availabilities are much lower in July than in previous years,” she said. “This could bring some risks to power supply, draw on fossil generation and trigger a short squeeze in EUAs.”
“The upside is, in our view, limited given the weak fundamental picture, with coal generation plunging to record lows.”