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EU ETS market update: War in Europe and Energy Crisis

Updated: Mar 8, 2022

For the coming 7 days the market seems to continue its bearish path as wider economic pessimism rises from the war in Ukraine. Margining requirements for utilities caused by huge rises in gas and oil prices look likely to keep the bulk of buying interest in EUAs subdued.

The dramatic price drop of last week looks unlikely to repeat but given last Thursday and Friday’s low volumes of trading and general lack of (investor) interest in the market, EUA prices look set to drift somewhat lower while the current war and corresponding energy crisis persists.

Eventually buying demand will recover as the market remains short and speculators may have largely liquidated their long positions last week. A recovery, however, depends on ability or appetite to buy EUAs to cover power sector emissions given soaring gas and coal prices.

We are approaching the end of the 2021 compliance cycle, 2021 verified emissions should be known by the 31st of March and by 30th of April the allowances should be surrendered. We should see some short covering there and also from utilities that have recently build up a back-log of uncovered positions, as they scramble to find liquidity for their full hedging.

Therefore short covering should commence the coming week. Given there are some bearish signals for this week, we are looking for a good entry point for investors that have a medium to long term horizon.

Germany not backing calls for a cut-off to Russian oil, gas supply: Germany is arguing that sanctions must be able to be sustained long term – and running out of electricity in a few weeks might force them to lift the sanctions. If disruption to energy supplies isn’t too great, that might soothe the gas market and allow for a return to normal trading – meaning a resumption of the positive correlation between gas and carbon.

Russia offers conditions to immediately end the war: oil, gas and other commodities dropped after news broke that Russia offered to “stop in a moment”, just ahead of todays meeting between representatives of the Russian and Ukraine governments, the Kremlin issued a list of demands to be accomplished if Ukraine wants the Russian invasion to be halted immediately. These includes, according to the Kremlin spokesman, the recognition of Crimea as part of sovereign Russian territory, as well as Donetsk and Lugansk as independent states. Consequently equities bounced back.

March 2022 TTF Gas trading above 200 Euros per MWh and even went up to 345 Euros per MWh, prompting margin calls – EUA buying interest is likely to stay subdued in the short term as other commodity prices soar, necessitating more funding to maintain those positions. Monday’s gas trading has been volatile and reached all time highs at 345 Euros per MWh, but also quickly retreated again to the mid 200s – these are tremendous moves and costs for energy users / producers, therefore EUAs are doing very little of interest. Given funding requirements for already high commodity prices, EUA buying may not be a priority at the moment. The short positions that is being build up by utilities and industrials, should be covered the coming period.

Energy prices increase but EUA prices drop, correlation ended? The big difference between EUAs and other commodities is you do not need to own an EUA to emit CO2, the allowances for emissions only need to be handed-in in April of the following calendar year. This allows some flexibility on the part of compliance buyers to sell some holdings and free up funds for maintaining positions on other contracts – like for instance natural gas. The market seems to have some catching up to do with regards to their EUA hedging.

Weather forecasts could influence EUA pricing: cold temperatures similar to last winter are forecast which could increase demand for gas. That is usually bullish for EUAs, but with the EU gas benchmark front month TTF Gas trading in the mid 200s, it might just put a strain on power producers and could prompt further EUA liquidations. This is a bit like kicking the can, and that also means this is a “game” market participants cannot continue forever or face large consequences.

Halting industry - reducing demand? Two Volkswagen factories in Poland are suspending production. High gas prices could prompt significant cuts in European production and therefore emissions both direct and indirect (through power consumption). Longer term sanctions are also likely to impact the EU’s industrial output and therefore EUA demand.

Speculators leaving: A lot of speculators were seen selling off in the futures since the beginning of last week. Much of that speculator length in the market should be gone by now so a price drop this week probably will not be so dramatic as last week.

Technical indicators: Although there are larger fundamental factors influencing the market, making technicals for the time being less relevant, market analysts are saying that from a technical perspective EUAs must recover to €70.48 to suggest that the selling is done. The market is oversold on the RSI indicator, but has been for the last few days and continues to trend lower. We do note support at 58 euros however, which has held for much of Monday.

Indicative EUA Price: €58.03

2022 Average EUA Price: €87.66

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