A Week of Flux and Forecasting

EU Carbon Markets Amidst Gas Price Volatility and Regulatory Shifts

In the world of carbon trading, the last week has been nothing short of a roller coaster. The European Union Allowances (EUAs) continued their downward trajectory, closely mirroring the dips in gas prices. This alignment is a testament to the intricate linkage between energy markets and carbon pricing. Yet, as we step into December, traditionally a month that bolsters emission prices, the carbon market finds itself at a crossroads, torn between fundamental weaknesses and potential for a rebound.

The power sector last week was characterized by a divergence in spot and forward prices. While spot prices saw an uptick, driven by reduced wind generation and a spike in power demand due to colder temperatures, forward prices took a different path. They trailed the downward trend of gas and EUA prices, with notable declines particularly in the shorter-term contracts. The market is now eyeing the €100/MWh mark for calendar contracts, a crucial threshold in energy pricing.

Last Week's Market Recap

• The EUA market experienced a steep downtrend, exacerbated by falling gas prices and aggressive selling from speculators.

• The Commitment of Traders report highlighted a significant increase in investment funds' net short position, adding pressure to the market.

• Despite a slight rebound on Friday, market participants remained cautious, attributing the recovery mostly to profit-taking by short traders.