Energy Aspects has reduced its near-term EU carbon price forecasts for the second time in as many months, cutting by as much as 15.4% and warning that EUAs could plumb new lows.
In its monthly carbon market research report released Tuesday, the London-based analysis firm cut its average price estimates for front-year EUA futures to €6.20 for Q1, €5.50 for Q2, and €6.00 for Q3.
Those were respectively down 8.1%, 15.4% and 14.3% from Energy Aspects’ previous estimates published a month ago.
“This does feel like the market is re-establishing its equilibrium around the €5 level and it now faces a long journey back to the prices seen at the end of 2015,” wrote lead carbon, gas, and coal analyst Trevor Sikorski.
“We remain sanguine over whether the market has stopped its declines. In a market with no meaningful fundamental floor to provide downward resistance, another wave of sell-offs could well batter prices.”
The Dec-16 futures twice hit a 22-month low of €4.62 in February, and flirted with that level again last week before climbing back to near €5.
Sikorski left his view for mean Q4 prices unchanged at €6.70, but estimated that EUAs would average €6.00 this year, down from his previous call of €6.50.
The annual average is some 20% above Tuesday’s closing price of €5.00 on the ICE Dec-16s.
Sikorski also left his forecasts for the rest of the EUA futures curve unchanged, but warned that “downside to [his] price forecasts seems more likely than upside.”
“We expect a slow but steady recovery for prices, back up towards more sustained trading between price levels of €6 and €7 in H2-2016. The upward drift is due to the drawdown in carbon inventory that we expect to see, but even this should be muted. The year will have its headwinds, with the start of fuel switching already beginning and expected to accelerate through the year.”
“This downside risk is compounded by the combination of more expected coal-to-gas switching, some further macro wobbles, and evidence that the utilities are modestly hedging less power,” he wrote in a separate note published alongside the monthly report.
Sikorski noted that the two potential sources of weakness for the market are the increasingly accommodating conditions for coal-to-gas switching for utilities, and rising interest in the carry, or repo, trade.
Gas prices across much of Europe have fallen further compared to coal, leading some power generators to start up their gas-fired generation operations for the first time in nearly five years.
Other factors such as the UK’s rising carbon floor price have also put coal at a disadvantage to gas.
“The bulk of the coal-to-gas fuel switching we expect to see will come, regardless of the EUA prices. Given that most of the emissions reductions will come regardless of the EUA price level, this switching will help reduce emissions and mean that EUA prices will see continued downward pressure in the market over 2017 and 2018,” Sikorski said.
Meanwhile, he said the repo trade, namely buying futures for near-term delivery and selling the further out ones, was “back in vogue” due to the emergence of negative interest rates across the eurozone.
The growing interest can also be seen in the narrowing spreads between the contracts in the past few weeks.
For example, according to data compiled by Carbon Pulse, the annualised yield on the spot-Dec18 has shrunk to 1% from 1.4% in mid-January, and the longer-term spot-Dec18 play has shrivelled to 1.1% from 1.7% over the same timeframe.
“With Euribor going negative at -0.015%, the [carbon] market still looks attractive to anyone wanting to lend to it,” Sikorski said.
“One implication for the market is that this trade could well be helping keep the prompt reasonably buoyant. Once (if) those spreads continue to drop, this could remove some much needed buying from the front end, and does raise the potential of further downside around the corner.”
Energy Aspects also reduced its forecasts for 2015 emissions under the EU ETS.
The firm now estimates that the stationary installations covered by the scheme emitted a total 1.815 billion tonnes of CO2e last year – a figure almost exactly in line with 2014’s total.
Energy Aspects forecasts that industrial emissions rose by 4 million tonnes, but that this was mostly offset by a 3.6 million-tonne decline in CO2 output from the power and heat sector.
The European Commission is due to publish preliminary EU ETS emissions for 2015 on Apr. 1.
By Mike Szabo – firstname.lastname@example.org