The recent sell-off in EU carbon prices seems overdone considering the market’s underlying fundamentals have hardly changed since the end of 2015, but longer-term prospects for EUA prices don’t seem as rosy as they once did, according to an analyst.
Front-year EUAs plummeted by as much as 21% between Dec. 31 and the 10-month low of €6.56 hit on Monday, but the speed of the drop suggests it was predominantly led by speculators, said Trevor Sikorski, head of carbon, coal and gas analysis at London-based Energy Aspects.
He attributed the price collapse, which has pushed the benchmark Dec-16 futures into a bear market from their 2015 peak of €8.78 to around €6.90 currently, to traders taking outright short positions, closing long ones, and potentially some industrials deciding to monetise some of their surplus allowances now rather than later.
“The sell-off does seem overdone given little change to underlying market fundamentals … [but] given this shift in the outlook of proprietary traders, it appears that the bullish narrative for carbon prices for the next few years is simply no longer convincing,” Sikorski wrote in a weekly note.
Analysts had predicted, on average, that prices would end 2016 at €10 and rise to €19 by the end of 2020, according to an Oct. 2015 poll taken by Carbon Pulse.
Sikorski cited, as two contributing factors, EUA supply levels that remain “staggeringly high” and fatter carbon auction volumes due to be sold by governments this year.
Despite forecasts that emitters in the EU ETS were net short allowances for 2015, that deficit is expected to represent a small fraction of the existing glut of more than 2 billion allowances currently hanging over the market.
In addition, and like in 2008, that shortage may be a rare one-off occurrence as EUA supply will rise this year. EU member states will auction at least 733 million EUAs in 2016, a figure that has increased by some 100 million compared to last year due to fewer units being withheld under the bloc’s Backloading programme.
“The demand side remains muted as continued growth in renewable capacity lowers the demand for thermal power, UK fuel switching adds to emission reductions, and regulations reign in [forward] hedging [by utilities],” Sikorski added.
“With every other energy commodity being sold off, the lack of a convincing reason for being long carbon leaves market participants with little option but to go short.”
Sikorski added that he would not be surprised to see prices post somewhat of a recovery this week as speculative bears buy back their short positions and take profits. Prices are already up some 35 cents or 5.3% from Monday’s bottom.
“However, a return to €8 seems like it could take some time.”
By Mike Szabo – mike@carbon-pulse.com
