EU carbon prices to see data bump followed by summer slump -analysts

Published 16:52 on March 22, 2016  /  Last updated at 16:52 on March 22, 2016  /  EMEA, EU ETS  /  No Comments

EU Allowances will see a short-lived bump following the release of data next week showing higher-than-expected 2015 emissions, a team of New York-based analysts said, but prices are then expected to fall to new lows this summer.

EU Allowances will see a short-lived bump following the release of data next week showing higher-than-expected 2015 emissions, a team of New York-based analysts said, but prices are then expected to fall to new lows this summer.

US-headquartered PIRA Energy Group expects preliminary EU ETS emissions data for 2015, to be published by the European Commission on Apr. 1, will show that CO2 output among the more than 11,000 installations covered by Europe’s cap-and-trade scheme rose by around 1% year-on-year.

They expect the figures to show that last year’s emissions were between 1.825-1.835 billion tonnes of CO2e, up from 1.815 billion in 2014.

That’s in contrast to most analysts polled recently by Carbon Pulse, who predict that output was mostly flat in 2015.

“An EUA price bump on bullish 2015 emissions is likely, with a potential rise coming in the days leading up to the release (as has been the case in previous years),” PIRA said in a Mar. 18 research note.

The analysts estimate that EU ETS emissions rose on the back of higher output from the power and refining sectors, overshadowing a decrease from steel production.

PIRA forecasts that the power sector, which accounts for the largest share of ETS emissions, will show a 2% annual rise in 2015, the first increase seen since 2011 and largest since 2003, and that it will be attributable to more coal in the European energy mix.

“Verified emissions have trended downward for so long that even a slight year-on-year gain could result in a more positive price reaction,” they added.

SUMMER FALLIN’

However, Roman Kramarchuk, PIRA’s managing director of global power, noted that EUA prices will likely slip to new multi-year lows this summer, on the back of cheaper gas.

“We haven’t hit the bottom yet,” he told Carbon Pulse by phone from New York on Tuesday, adding “we see gas prices bottoming out this summer, and with them carbon demand and prices.”

“Utilities have been moving to more shorter-term and real-time hedging strategies, so with auction volumes steady we’re talking about supply not changing but demand becoming much more up and down.  And in the next few months, demand will trend down.”

PIRA forecasts that EU carbon prices will fall from current levels near €4.80 down to €4.50 or even below that by July.

The analysts added that gas prices are then expected to tick higher towards summer’s end, bringing some coal-fired generation back into the money.

This will prompt front-year EUA prices to end 2016 around the €5 mark, well below 2015’s close of €8.29.

And while overwhelmingly bearish fundamentals suggest slim odds for an EUA price recovery in the near-to-medium term, the analysts noted that there may be more bullish prospects in the long-term.

“There are a few bullish cases that could be made longer term, possibly around nuclear units [being closed due to low power prices].  There’s some potential upside there for carbon, but it’s not going to happen overnight,” Kramarchuk said.

However, PIRA is currently forecasting a resumption in the decline of power sector emissions for 2016, as well as long-term annual decreases for both overall ETS emissions and EUA demand.

By Mike Szabo – mike@carbon-pulse.com

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