European carbon futures rallied above EUR 18/ton week ending August 17, 2018, for the first time since November 2011, according to the Intercontinental Exchange. This comes after years of permits trading well below EUR 10/ton in the aftermath of the 2007-08 financial crisis, combined with an underlying oversupply of allowances in the market.
As of August 2018, European Emission Allowances (EUAs) more than tripled during the past 12 months, largely due to European Trading Scheme (ETS) reforms that will start slashing the oversupply of permits as of January 2019. In May, the European Commission revealed the Market Stability Reserve (MSR) will remove 397 million permits from auctions next year alone.
During summer, trading tends to ease, and exchanges will auction just 4,4 million allowances in August, less than 50 percent of July’s supply. This continues to help support the market along with continued demand for EUAs.
Apart from the fundamental drivers of the market, technical trading also largely drives the front EUA contracts, namely Dec18 and Dec19. Considering the recent price move through EUR18/ton, the drivers on the bullish side include:
- Open interest increase while prices rose, meaning that traders could be speculatively buying EUAs to build long positions in their books
- Price broke above EUR 16.2/ton and EUR 17.50/ton technical resistance levels
Technical indicators are also sending some bearish signals, which may cap gains:
- Relative strength index (RSI) is at 70, indicating that the market could be overbought
- Moving average convergence-divergence (MACD) is turning bearish, which could mean that downside momentum is increasing
EUAs tend to move up along with the rest of the energy complex. Companies like EON and RWE with large exposure to EUA price movements are expecting a continuation of this move and reduced their hedges for 2020 and 2021 by half.
As we exit the summer season, Genscape’s analysts will continue to look closely at the market. The EPSI platform allows us to evaluate the supply and demand fundamentals of the market to assist clients with capitalizing on opportunities and managing risks. To learn more about the EPSI platform, click here.