Weekly Carbon Trading Market Update – 2nd November, 2015

Market Development

EUA carbon price closes the week at €8.64, up 1c week-on-week Another new 3 year high set intra-week Price in GBP actually falls slightly as £ strengthens more vs. the € Clean dark spreads strengthen 6 %   Energy Aspects slash long term price forecasts amid expected glut of natural gas Draft rules for China's national ETS emerge Environmental Finance Annual Market Rankings now open

Auction Overview

885Mt comes to market this week in four EUA auctions and one EUAA auction (11.952Mt EUA & 0.933Mt EUAA) 828Mt EUA will come to market in in total in November

EUA Price Action

New 3 year emissions trading highs were set three times last week but ultimately the week ended essentially flat with just a 1c week-on-week gain. With a close of €8.64 the market failed to sustain earlier gains as the price fell away from the high of the week, €8.71, set on Thursday. Price action last week was subdued with EUAs trading in an 18c range despite last week's news on lignite hedging and clean dark spreads strengthening by more than 6%. The lack of upward follow-through indicates that EUA price rises have run out of steam for now, however this week is a low auction week so further gains cannot be ruled out. Away from short-term pricing, our carbon research specialists Energy Aspects have cut their long-term EUA price forecasts (see below) amid an expected LNG tsunami. The oversupply of gas is expected to lead to additional fuel switching from coal to gas reducing the emissions of the electricity utilities sufficiently to upset carbon supply / demand balance in 2017 and 2018, the intervening period between backloading and the MSR. 200Mt of allowances being backloaded in 2016 cushions the ETS from any gas related price impact until 2017. The change in forecast highlights the importance of up to date and reliable price forecasts for risk management and budgeting purposes. The recent gains are not good news for short installations waiting until year-end to hedge however, the recent Euro weakening against the Pound results in UK installations seeing lower price increases as the FX rate keeps a lid on things. Price Impact: despite bullish indicators the market failed to make further substantial gains last week. In a normal auction week we would expect this to lead to losses this week but because we have a low auction week the direction signals have become mixed. However if EUAs don't make gains this week then we can expect a price correction downwards towards €8.25 and possibly further. In addition to the short term supply and demand fundamentals summarized above Energy Aspects' change of forecast will have spooked the longs banking on substantial price gains over the next few years and any price drop will have them jostling for position by the exit door.

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Late on Friday Energy Aspects slash medium and long term price forecasts in their latest Emissions Outlook

Energy Aspects say: "We think there is a bearish cloud on the horizon, and this month we align our carbon analysis with our recently completed 2017 global gas balances. The result of that balance points to European hub gas prices falling below 30 p/therm by 2017 as Europe accommodates the increases in global LNG supply by pushing gas into power at the expense of coal…

…This has a significant impact on market prices, with our 2017 price forecasts down to 10 €/t (down from 12 €/t) and 2018 now expected to trade around the 9 €/t level (down from 14 €/t)…

…The lower level of emissions forecast for the period out to 2020 keep the levels of market inventory higher. This will require the MSR to remove carbon for around four years longer than our previous estimates, with the MSR now removing carbon until 2028, putting some 3.3 Gt of carbon into the reserve. This now implies the MSR will need some 33 years to put carbon back into the market before it is empty. We have reduced our long term average prices for phase 4 (2021-2030) from 41 €/t to 33 €/t."

If nothing else this change demonstrates the importance of having a carbon market analyst on your team. If you are not receiving Energy Aspects Emissions Outlook courtesy of Redshaw Advisors every month please contact us.

Draft of China's national emissions trading scheme rules released

Details of the National Development and Reform Commission's (NDRC's) opening draft of China's national emissions trading scheme rules have emerged and they give some insight into the structure, rules and regulations that will make up the national scheme. To read more details please click here.

The week ahead

Despite fresh highs, last week turned into a week of consolidation rather than gain despite the strong short term fundamentals. With Energy Aspects' news spicing up the mix this week's price developments will set the scene for November, any sign of weakness creates the risk of a small price rout. However even EA still predict higher prices next year so any price correction is likely to be relatively short lived.