EU allowance prices were boosted by progress on a Greek bailout and plans to reform the continent's carbon market, says Louis Redshaw
Market Development
- Price closes up 13c at €7.75
- Price hits €7.85 high on Tuesday
- Greece bailout resolution gave CO2 impetus to break the resistance at €7.64
- EU Commission releases Phase IV EU ETS review proposals
- Power and coal prices rise as euro weakens
Auction Overview
- 15.075Mt enters the market this week in five auctions
- Last two weeks of normal auction supply before volumes halve through August to coincide with summer holiday shutdowns
Price Action
Last week was bullish for European carbon prices as the Greek bailout deal and emission trading system (ETS) structural reform helped to reinforce analysts' higher price forecasts.
Last week's high of €7.85 ($x) was the highest price on the EUA December 2015 contract since February 2015.
The year's high of €7.90 and the important psychological level of €8 now appear to be firmly within sight as auction volumes, which are already reduced due to backloading, are halved through August.
The upwards momentum started last Monday as a Greek bailout deal was agreed and the resistance at €7.64 was broken. The front-December contract had repeatedly bumped up against this resistance but finally broke through, presaging further price rises.
Price very briefly dropped back below the resistance level on Friday morning following a weak auction that cleared 5c below the market. However, as is often the case, previous resistance turned into support on the way down and the price rallied through Friday afternoon to finish the week at €7.75, a week-on-week gain of 13c.
Price Impact: with the August auction shutdown looming, it is possible we will see further price rises as already-reduced auction supply falls further.
It is unclear the extent to which recent price gains can be attributed to increased hedging activity ahead of the supply fall, and how much is due to speculators being relieved by a third Greek bailout.
Market Stability Reserve (MSR)
Important MSR Dates:
- 18th September – EU Environment Minister endorsement
The EU Commission releases the first post-2020 ETS Review
The European Commission (EC) released its proposal for the revision of the EU ETS on Wednesday. The review is deemed necessary to keep Europe on track to meet its aim of a 40% reduction in emissions by 2030 by extracting a 43% reduction from companies covered by the EU ETS.
The reduction of supply (both free allocations and auctions to achieve the 43% emissions reduction target) will lead to increased costs for all EU ETS participants.
The week ahead
Breaking and re-testing the technical level of €7.64 may prove to be a significant step towards the analysts' longer-term higher price forecasts. Combined with July being a bullish month for carbon for the third year in a row and August seeing price gains every year since 2008, the odds are in favour of further price gains over the coming weeks.
Louis Redshaw is a founder of Redshaw Advisors