EU ETS Monthly Report – April 2018

European carbon completed twelve consecutive months of price increases in April, setting a new record for sustained gains, as the annual compliance cycle combined with continued speculative interest to boost the market.

December 2018 EUAs ended the month up by 2.3% from March 29 at €13.60/mt on ICE Futures; one year ago the contract closed at €4.57/mt!

April started with the publication of EU ETS verified data for 2017: CO2 emissions last year rose by around 0.3%, the first increase since 2010. An increase had been widely forecast, due mainly to increased coal generation as nuclear plants suffered reliability problems and hydro generation was very low in many parts of Europe.

The market managed to fend off repeated bouts of profit-taking and some attempts to squeeze long positions out of the market, and during the month EUAs set a new 6.5-year record price of €14.22/mt.

Trading volume in the front-December contract was down around 12% from March, as the rapid price rise (31%) of last month gave way to a relative consolidation in April.

Carbon has risen exactly two-thirds since the start of 2018, and if analyst forecasts are to be believed, we may see prices heading towards €15/mt later this year. With the Market Stability Reserve’s launch growing ever closer, more and more industrials are believed to be building reserves of EUAs while they remain relatively cheap.

The month’s price action was dominated by speculative traders and by the annual compliance cycle. Industrial installations and power stations had until April 30 to deposit with the European Commission EUAs matching their verified emissions for 2017.

According to market sources, many industrials had put off buying their remaining EUAs in the hope of achieving lower prices. There were numerous reports of last-minute buying in the final week which no doubt helped to boost prices.

While compliance was reaching its climax, the speculative element continued to support the market, betting on higher prices in the coming months. Open interest in call options for December 2018 EUAs has risen to 207 million tonnes, while put options show a total of 139 million tonnes of OI.

The majority of open interest in the call options rests between strike prices of €13-20, suggesting that if prices rise further, sellers of these options will need to buy additional EUAs to cover their exposure.

The question in the market is what will happen to prices now that compliance is over. Fundamentals do not support carbon at such high levels, many traders say. With the clean dark spread in negative territory for a significant number of coal-fired generators, the incentive to sell forward power and the hedge is limited.

Even margins for lignite-fired plants – typically among the cheapest but dirtiest to operate – are shrinking, analysts say.

There’s considerable speculation over just how much forward power utilities are selling at these profit margins. If power generators aren’t selling electricity and buying carbon, then who will keep the EUA price up above €13.00?

Trading in May will, therefore, be closely watched for any signs that speculative interest is diminishing. Analysts in mid-April raised their price forecasts for 2018 by around 30%, but it remains to be seen whether carbon can average around €12.00-13.00 for the whole year.

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