Factor

Broken carbon trend flags further losses this month

viernes, 04 de octubre de 2019 | Trading

A drop in carbon prices below EUR 25/t could herald further losses for EUAs in October, as weak technical signals accompanied a looming Brexit deadline and a surplus of gas in the power sector. 
The benchmark Dec19 contract closed September at EUR 24.72/, nearly EUR 0.30 below a 200-day simple moving average, a trend line last briefly broken in late February.

“At the moment [CO2] looks weak and a test of further downside at EUR 23.66/t is very likely,” said Yan Qin, analyst at Refinitiv.    

September’s close also marked the fall of another important support level linking previous lows in September, February and November, said Sandrine Ferrand, analyst at French utility Engie. 

“If prices do not start to rebound this week, there might be further downside,” she said. 

Brexit deadline nears
In addition to technical pressure, analysts pointed to risks from a potential hard UK withdrawal from the EU at the end of the month.

The UK parliament has demanded prime minister Boris Johnson seek an extension from Brussels to a deadline to leave the bloc if no deal has been agreed by 19 October.

Yet Johnson is reluctant to do so, while France has signalled it would not grant an extension anyway – leaving bookmakers’ odds the UK crashes out of the EU without a deal in place this month at around 25%. This outcome could force the sale of around 100m UK allowances.     

Weak gas prices and slowing economies also looked set to weigh on carbon this month. Moody's expected European steel production to decline 2% over the next 12-18 months due to pressures from a softening global economy . 

Yet greater anxiety about future Russian gas flows through Ukraine could add support, according to London's Energy Aspects. 

Weaker gas?
Russian gas transit negotiations with Ukraine should resume at the end of October. The potential for talks to fail has supported a stiff premium in forward prices relative to the spot market. That in turn has implied a greater need for coal-fired generation this winter. 

Energy Aspects expects a crash in forward gas prices in the event of a deal, as it would remove the risk of a roughly 21bcm shortfall of gas reaching Europe this winter.


(Montel) A drop in carbon prices below EUR 25/t could herald further losses for EUAs in October, as weak technical signals accompanied a looming Brexit deadline and a surplus of gas in the power sector. 
The benchmark Dec19 contract closed September at EUR 24.72/, nearly EUR 0.30 below a 200-day simple moving average, a trend line last briefly broken in late February.

“At the moment [CO2] looks weak and a test of further downside at EUR 23.66/t is very likely,” said Yan Qin, analyst at Refinitiv.    

September’s close also marked the fall of another important support level linking previous lows in September, February and November, said Sandrine Ferrand, analyst at French utility Engie. 

“If prices do not start to rebound this week, there might be further downside,” she said. 

Brexit deadline nears
In addition to technical pressure, analysts pointed to risks from a potential hard UK withdrawal from the EU at the end of the month.

The UK parliament has demanded prime minister Boris Johnson seek an extension from Brussels to a deadline to leave the bloc if no deal has been agreed by 19 October.

Yet Johnson is reluctant to do so, while France has signalled it would not grant an extension anyway – leaving bookmakers’ odds the UK crashes out of the EU without a deal in place this month at around 25%. This outcome could force the sale of around 100m UK allowances.     

Weak gas prices and slowing economies also looked set to weigh on carbon this month. Moody's expected European steel production to decline 2% over the next 12-18 months due to pressures from a softening global economy . 

Yet greater anxiety about future Russian gas flows through Ukraine could add support, according to London's Energy Aspects. 

Weaker gas?
Russian gas transit negotiations with Ukraine should resume at the end of October. The potential for talks to fail has supported a stiff premium in forward prices relative to the spot market. That in turn has implied a greater need for coal-fired generation this winter. 

Energy Aspects expects a crash in forward gas prices in the event of a deal, as it would remove the risk of a roughly 21bcm shortfall of gas reaching Europe this winter.

“While Russia and Ukraine positions are too far away from each other for an agreement in October to be likely, there needs to be progress or the risk premium already priced into Q1 20 European gas contracts will widen,” said EA analyst Trevor Sikorski in a note to clients. 

Carbon supply will increase in October, with the EEX auctioning 59m allowances, 5m more than in September. This is still 38m fewer than last October, thanks to market stability reserve cuts.

“We still see EUA prices to average EUR 25/t in Q4,” said Refinitiv’s Yan Qin, noting the tightening impact of the market stability reserve, buying from industrial companies obliged to cover their emissions and forward hedging among utilities.  

September closed 6% below the previous month’s close. The Dec19 averaged a close of EUR 25.75/t last month and ranged between EUR 27.35-24.60/t. Trading volumes rose 11% as the Ice exchange handled 410m tonnes of Dec19 allowances, compared to 370m in August.

Source: Montel