EU ETS Report – May 2019
European carbon prices ended the month on a weak note, closing down 5.1% at €24.46 on May 31. After the annual compliance cycle closed at the end of April, volatility and trading volume ebbed away amid the Easter break and other public holidays.
May’s high-low range was €2.93, the smallest since June 2018 and considerably narrower than April’s €6.85 range, reflecting a drop in compliance demand and a more-or-less stable merit order. Gas remained firmly in the money at the front end of the curve, though coal has begun to display a better margin in the calendar 2020 contract.
The weather has begun to shift towards summer season, bringing with it an improvement in solar and wind generation which has trimmed the demand for fossil generation. The result was that carbon became a “passenger”, driven by moves in gas prices and not showing much direction of its own.
Prompt TTF gas prices are at nearly three-year lows; the year-ahead contract rallied nearly €2/MWh in the first week of the month but gave up most of the gains over the rest of May. Calendar 2020 API2 coal continued its steady decline and reached a two-year low of $64/tonne by the end of the month.
There were attempts to move the market in either direction by short-term traders, but opportunistic buying by compliance entities and profit-taking by speculators kept the market rangebound.
Technical signals increasingly reflected a lacklustre market mood; the relative strength index steadily declined towards a neutral readout, while the Bollinger bands shrank to their narrowest since last August. Normally a narrowing of Bollinger bands presages a price breakout, but this did not take place in May.
The announcement by UK prime minister Theresa May on May 24 that she will resign in early June boosted expectations of a hard Brexit. Candidates to replace May are seen as more open to a no-deal Brexit in the event that the EU does not agree to renegotiate the withdrawal agreement.
While this development might be expected to increase the chances of a rapid sell-off of surplus UK allowances, analysts say that UK-based companies have had more time to make arrangements to “park” their EUAs in continental accounts, and therefore there is less chance of a rapid liquidation of the surplus.
The outlook for June is flat to bearish, according to market participants. A lack of hedging activity from the power sector is likely to cap demand, while buyers will be watching for price dips before entering the market.
The historical performance of prices in May, June and July is evenly split between increases and decreases, so much will depend on the actions of speculative traders. The selection process for a new Conservative leader in the UK will also add a note of uncertainty to the market.