The main drivers of EU Allowance prices are bearish at present, so further price falls are likely, says Louis Redshaw
Market Development
- EU Allowance (EUA) prices closed the week 20c lower at €4.96
- Trading was muted in the build-up to the European Parliament vote
- 2017 free allocations are to be distributed in the coming days
- Parliament approved the Phase IV reform file and gave MEP Ian Duncan the mandate to begin EU Council negotiations
- The proposed 24% withdrawal rate for the Market Stability Reserve (MSR) passed, but the more ambitious Linear Reduction Factor (LRF) and the cement import tariff were both axed
Auction Overview
- Five auctions this week will bring some 22.4Mt to market, up from about 17.3Mt last week
- An extra 7Mt will be auctioned in March compared to February (~86.3Mt v ~79.3Mt)
EUA Price Action
EUAs slipped 20c lower last week despite the EU Parliament voting through a Phase IV reform file that included plans to double the withdrawal rate of the MSR. Allowances ended the week just under €5.00, having traded in a relatively tight 41c range.
Price moves near €5.00 are running into bid support, probably from compliance buyers with freshly verified emissions data, but speculators appeared happy to load up their short positions when prices tried to move higher in the run up to the vote.
Trading volume was muted for much of last week as the market waited for the EU Parliament vote. The phase IV reforms passed with little fuss on Wednesday, apart from a bit of EUA volatility in the few minutes around the amendment votes, but things quickly settled down.
EUAs appeared to be heading for a bigger weekly loss but a rally on Friday afternoon kept prices above €5.00 with a small drift off towards the close.
Price Impact: Of all weeks, last week should have been an 'up' week because of the lower auction volume and a price supportive vote in the EU Parliament yet, as expected, we saw small losses. The sideways trading around €5 cannot continue indefinitely and bearish pressures are mounting that it seem only strategic buying can counter...
| Weekly Price Changes (EUR) | ||||
|---|---|---|---|---|
| Product | 10/02/2016 | 17/02/2017 | Change | % Change |
| EUA Dec 16 | 5.16 | 4.96 | -0.20 | -3.88% |
| DE Power Cal 17 | 30.00 | 30.09 | 0.09 | 0.30% |
| API2 Cal 17 | 61.74 | 63.31 | 1.56 | 2.53% |
Week ahead
Obvious EUA price drivers are bearish. One more auction this week means about 22.4Mt will come to market. Free allocations for 2017 will start to be distributed this week and, even though selling by 'long' installations is likely to be fairly limited, there will be some, adding to the volumes on offer. The weather has also turned unseasonably warm in some parts of Europe and, finally, there is the prospect that March auctions will bring an additional 7Mt to market when compared with February and 16Mt more than January.
However, the market has so far held up and avoided the large falls below €5 expected by some. Year-end compliance buyers are providing something of a price back-stop, taking advantage of current prices that are just below last year's average EUA price of €5.36. It is also likely that the EU Parliament vote will have triggered at least some strategic purchasing by long-term shorts (e.g. electricity utilities). Unfortunately, quantifying this extra demand is essentially impossible so the idea remains anecdotal. Finally, the market is trading short so, if the compliance and strategic buying is big enough in the short-term to overcome the available supply, there is the chance of higher prices as speculators are forced to reverse their positions. Given the supply headwinds, that prospect remains a big if, so our risk-adjusted expectation is for lower prices.
EU Parliament votes through proposal to significantly strengthen the EU ETS
MEPs in the European Parliament have voted through the Environment Committee (ENVI) proposal to reform the EU ETS in Phase IV with several amendments. The proposal passed with 379 votes to 263 and 57 abstentions. MEP and rapporteur for the Phase IV file, Ian Duncan, also received a mandate to open negotiations with the EU Council, the next step in the legislative process. The reform proposal moving forward is slightly weaker than the ENVI position but far more ambitious than the original EU Commission proposal. If adopted by the EU Council, as is expected, it will lead to significant upward revisions to EUA price forecasts for the end of Phase III and beyond.
Louis Redshaw is a founder of Redshaw Advisors