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EUAs jump 7% ahead of looming compliance deadline

03 Feb 2023 11:30

Photo: Pexels

Photo: Pexels

03 Feb 2023 11:30

(Montel) European carbon prices gained almost 7% for the second consecutive bullish week on technicals and hedging ahead of April’s compliance deadline. 

The benchmark Dec 23 EUA contract was last seen up EUR 2.24 at EUR 95.25/t on Ice Endex, 7% higher than last Friday’s settlement of EUR 89.23/t. 

“In an environment where fundamentals appear to have taken a back seat, it is hard to find a reason for this recent move but commentators have suggested it may be driven by investor positioning and options hedging strategies,” CF Partners said in a note. 

This week’s price increase was mostly driven by technicals, with changing weather forecasts also giving some direction, said Henry Lush, EU carbon market analyst for Greenfact, with colder conditions likely to boost demand amid the need for more conventional generation. 

“Watch weather and technicals for the week ahead,” he added. 

Compliance deadline adds pressure
The upcoming compliance deadline on 30 April was also “adding pressure and tightness” to the market, he said. 

The latest commitment of traders’ report, which gives a breakdown of the positions held by market participants, pointed to a flip from a net short to an overall long position of EUAs. 

This would also be bullish for carbon prices along with a seasonal upward trend amid higher compliance buying, analysts said. 

“There was a lot of short position held by traders but that’s flipped and they’re now long – investors had been in net short position for three weeks in a row,” Vertis carbon analyst Riham Wahba said. 

“Compliance entities’ net long holdings have increase by 20% so it looks like everyone is quite long on the market right now, which suggests prices could go up.” 

Prices would likely trade sideways or slightly down in the week ahead, participants predicted. 

Possible correction 
The market was “a little bit overdone” at close to EUR 100/t, which was likely the upper limit in the short term, said Pact Capital carbon analyst Bernadett Papp. 

“I would expect the price to return to lower levels... EUR 90/t or EUR 85/t could be a good support if there is a correction in the market,” she added. 

“If we see a breakout above EUR 100/t we could retest the historical maximum but it depends on the market willingness to push this level, I don’t this happening next week,” Wahba said. 

Cumulative EU 27 power sector emissions so far this year were 18% down compared with the same period last year, according to Icis estimates. 

“However, the EUA market seems to be resilient to these bearish signals,” carbon analyst Lewis Unstead said. 

“Overall, carbon is the bullish outlier in a bearish energy complex. It’s surprising that EUAs have not started to lose momentum amid a lack of new fundamentally bullish drivers to support the bullish move,” he added. 

For a discussion of current carbon market conditions, listen to this week’s Montel podcast.

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