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Commerzbank expects CO2 price correction by year end


26 Oct 2018 15:47


26 Oct 2018 15:47

(Montel) A recent slump in European carbon prices pointed towards a likely correction in the market before the end of the year, Commerzbank analysts said in a report on Friday.

Benchmark carbon prices – which reached some of their highest levels in a decade above EUR 25/t in September – have in recent weeks fallen back to around EUR 18-19/t.

Speculation has played a far greater role in the run-up and subsequent sell off than fundamental factors, the bank said. To this end it highlighted a 48% jump in trading volumes between January and August.

“A particularly alarming fact is the large open interest in call options at present,” the bank’s analysts noted.

By mid-October there were more than 100m open call options expiring in mid-December on London’s Ice exchange.

Nearly half of these options to buy carbon allowances were profitable at a price of more than EUR 19/t. On Leipzig’s EEX exchange, which reports open interest differently, another third was “in the money at present.”

This had the potential to trigger a wave of selling towards the end of the year, leading the bank to expect another correction.

“A setback to EUR 15/t cannot be ruled out.”

Not so tight
European reforms that will start tightening supply from next year will have a supportive impact on the market, the bank's analysts said.

“We estimate that it should take three or four years for the surplus to be absorbed and the number of allowances in circulation to fall to the envisaged 833 million,” Commerzbank said.

This would be challenging for those companies effectively obliged to buy in the market, especially utilities. However, the manner in which electricity is generated is changing rapidly, it added.

“The increase in electricity production in the first three quarters, which even amounted to 0.7% in Germany, was exclusively brought about by renewable energies.” Their output was up 10% year on year.

Ultimately, the fundamental environment for the carbon market would “not produce much uplift”, despite the start of the market stability reserve.

Commerzbank has nonetheless raised its price outlook for EUAs relative to its previous forecast from 9 October.

It sees the benchmark contract averaging EUR 18.80/t in the fourth quarter and edging higher to EUR 19/t by the second quarter of next year. That is around EUR 1 above the last outlook.

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