The price risk for EU Allowances remains skewed to the upside over the Christmas period, after a gain of almost 10% last week, says Louis Redshaw
Market Developments
- EU Allowance (EUA) price gained almost 10%
- Prices rose 44c on the week to close at €4.90
- Bullish ENVI proposal helped push carbon prices higher
- Final UK auction failed to clear due to lack of bids
- Higher power prices gave further impetus to EUAs
Auction Overview
- No auctions left in 2016. The first 2017 auction is on 9 January in a big week that will bring about 22.4Mt to market
- The failed UK auction volume will be split between the first four UK auctions in 2017, taking the volume in each auction to about 5.14Mt from approximately 4.27Mt previously
EUA Price Action
A bullish proposal from the EU Parliament's environment committee (ENVI) pushed EUA prices higher last week as MEPs reached an agreement on Phase IV reforms. The week closed at €4.90, nearly 10% higher, having traded above €5 for the first time in December.
News of the compromise and a more bullish than expected proposal on Tuesday evening caused the market to gap higher on Wednesday morning, in advance of the vote, as prices climbed to the intra-week high of €5.19 in early trading.
Following the ENVI vote on Thursday, prices tailed off in a classic 'buy the rumour, sell the fact' pattern as traders took profit. But prices found support on Friday afternoon and finished at €4.90, setting a bullish tone coming into this week.
Aside from the ENVI proposal and vote, rising power prices provided extra impetus for carbon to move higher and the failed UK auction on Wednesday only halted the climb temporarily as prices fell in the immediate aftermath. The UK auction failed due to a lack of bids, which is ordinarily a bearish sign but it results in less short-term supply than originally expected, and the impact was compounded by the fact it was the final week of auctions in 2016.
The fortnightly UK auction is the only one to take place on ICE and typically attracts fewer bidders than the other auctions which take place on EEX. The un-auctioned allowances will now be evenly split between the first four UK auctions of 2017 which, coupled with the end of backloading, will see those auctions total over 5Mt each. The first auction week of 2017, beginning on 9January, will now bring more than 22Mt to market.
Price Impact:
The road to Phase IV reforms of the EU Emissions TradingSystem is long but last week's ENVI proposal showed a willingness to take ambitious steps. Most of last week's price development hinged on the ability of the two largest political groups in the EU parliament to find a compromise. In the end it came and enables MEP Ian Duncan to head for a full parliamentary vote with the environment committee's proposal endorsed by the largest parties.
ENVI delivers bullish proposal
The environment committee adopted the proposal put forward by MEP Ian Duncan on the EU-ETS Phase IV reform. It was voted through with 53 votes for, 5 against and 7 abstentions. The lengthy proposal provides a position on all aspects of the EU ETS such as indirect carbon costs, auction share of allowances, carbon leakage, management of the modernisation fund and use of auction revenue, among others. We analyse the main points of the proposal and the impact on carbon prices in our updated blog. You can find the blog here.
Week ahead
The Christmas period can be tricky to predict. It is typically characterised by long spells of range-bound trading and lower than usual volumes, especially in the few days before and after Christmas. That said, the lack of auction supply and market players make volatile periods a possibility with the risk remaining skewed to the upside in the near term. The closer we get to the auction resumption in January, the more that risk fades.
This is the final weekly update of 2016, the next update will be published on 3 January 2017.