Analysts at French investment bank Societe Generale on Tuesday slashed their EU Allowance price estimates by 24% across the board but said the recent price rout has been overdone, recommending that its clients buy with caution.
The analysts predict that front-year EUA prices will end 2016 at €6.80, they wrote in an emailed report, down from their previous view of €9.00 published last September but 45% above current levels near €4.70.
Prices are then seen creeping up to €7 by the end of 2017, SocGen said, adding that EUAs should continue to increase steadily to €7.80 by the end of 2020. Those forecasts were below the bank’s previous respective estimates of €9.23 and €10.22.
Dec-16 EUA futures are down by more than 40% since the end of 2015, in a rout thought to be fuelled mainly by speculative selling and exacerbated by both industrials offloading spare allowances and utilities declining to buy at their historical rates.
“We believe the current move to be overdone. Thus, we expect a rebound, and possibly a sharp one. We quantify this in the order of 20-30% … [with] prices having the potential to reach and pass the €6 mark by the end of Q1,” SocGen’s European power, coal and carbon analyst Paolo Coghe wrote.
“That said, while the current price level represents an attractive entry point, with pay-off skewed to the upside, we do not expect prices to bounce significantly any time soon unless the current poor macro[economic] and low fuel price environment changes for the better.”
**Click here to see Carbon Pulse’s analyst EUA price poll for Q1-2016**
Carbon prices have tumbled so far this year alongside wider energy prices including German power, European coal, and crude oil.
However, EUAs gained throughout much of 2015, posting an 11% gain for the year before starting to fall precipitously in the new year. In contrast, peripheral electricity and fuel prices have been on the decline for several years.
“Carbon prices had been up trending for a long time, while the global macro situation (and that of commodities in particular) has deteriorated, and so one cannot exclude a contagion effect [in the EUA price decline],” Coghe wrote.
“Given the prevailing low fuel price environment, the fact that carbon prices showed a positive uptrend – essentially unabated – since mid-2013 ought to have raised some flags … Carbon’s nearly continuous price increases for 2014 and 2015 had gotten out of sync with coal and power, carbon’s ‘underlyings’.”
Coghe said his analysis showed that some recent EUA trading positions were opened and closed in short succession, pointing to speculative rather than compliance-driven activity.
He added that he sees front-year EUA prices entering the second half of 2016 at €6.90, representing a 47% rise on Tuesday’s closing price.
By Mike Szabo – mike@carbon-pulse.com
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