SocGen: EUAs to rise further, but don’t expect a smooth ride

Published 19:22 on March 18, 2015  /  Last updated at 14:54 on May 11, 2016  /  EMEA, EU ETS  /  No Comments

French investment bank Societe Generale has lifted its 2015-2020 EUA price forecasts by 15 percent across the board, recommending its clients buy at current levels but warning of a rocky ride ahead due to uncertainty surrounding the MSR.

French investment bank Societe Generale has lifted its 2015-2020 EUA price forecasts by 15 percent across the board, recommending its clients buy at current levels but warning of a rocky ride ahead due to uncertainty surrounding the MSR.

In a research note published after market close on Wednesday, SocGen said it expects front-year EUA futures to end the year at €8.32, up from its previous estimate of €7.21 made last November and some 23% above today’s settlement.

The bank raised its forecast for subsequent years, all by just over 15%, forecasting that EUAs will finish 2020 at €9.64.

“We note that price increases are building up on the support from continued positive regulatory action. Difficulties in the agreement and implementation of the MSR will not hold back price progression, although of course they will weigh on it and add to volatility,” the bank’s analysts said.

“In the interim, not only we have not changed our expectation of a positive overall outlook for EUAs, but our models suggest that current price levels constitute attractive entry points.”

SocGen added that if EU lawmakers approve the MSR by year-end, EUA prices could spike by 45-75% to €10-12 by the end of Q1 2016.

“We upgrade our forecasts, but continue to resist the temptation to fully price-in the most optimistic MSR scenario possible.”

“Much as before, we see prices increasing on the back of strong and concrete political will behind structural reforms for the EU ETS. We are aware, however, that the final MSR outcome will be driven by compromise.”

At least 15 mainly western EU nations have said they favour a 2017 start to the mechanism, while at least eight predominantly eastern member states – enough to form a blocking minority – want a later launch.

RESISTANCE AND HICCUPS

SocGen predicts EUA prices will remain in the up-sloping trading channel that has stood since May 2014, with technical support around €6.35-6.50 and resistance around €7.50-7.65.

“The whole set-up will turn positive once the resistance is cleared, and in this case the move up could extend to €8.70 and beyond,” they said, but warned that momentum indicators showed that prices could be due for an extended break in their upward climb.

“We think the market is both catching its breath and coming to terms with the various sources of uncertainty and the continued possibility for hiccups in the process,” SocGen said.

“We are going to continue to see plenty of posturing and plenty of patchy and unsettled action in the market as it continues to chew and digest new developments.”

By Mike Szabo – mike@carbon-pulse.com