EU Carbon Market Analysis Heading into December 2023

Insights and Trends in the European Carbon and Power Markets

Current State: A Tenuous Balance in EUA Markets

Last week, the European Union Allowances (EUAs) experienced a period of restricted movement, largely influenced by the prevailing colder and calmer weather conditions. Despite expectations, these factors failed to significantly revive the market, which is now gradually edging towards a softer stance this week. This downturn is attributed to revised weather forecasts predicting milder and windier conditions, hinting at lesser-than-anticipated withdrawals from gas stocks.

Power Market Dynamics: Oscillating Prices Amidst Changing Weather

The power sector mirrored these fluctuations. Spot prices rose, influenced by varying weather regimes, necessitating intermittent increases in thermal generation. However, forward prices displayed ambivalence, initially propped up by a slight recovery in the fuel complex, only to be dampened by signs of weakness in EUAs. The beginning of this week saw a more pronounced downward trend, fueled by these mixed indicators.

Prospective Market Trends: Potential Rebound and Bearish Risks

• Emerging Upside Risks: Despite the prevailing market pressure, signs of potential rebound are budding. Notably, there's an increase in the open interest of call options compared to puts, and a slight reduction in net short positions by speculators for the first time in five weeks. This pattern suggests a growing market sentiment leaning towards a potential price rebound.

• Compliance Buying and Weather Patterns: Although compliance players haven't yet shown increased interest due to low prices, the forecast for colder, calmer weather in the coming weeks could boost demand from thermal power plants.

• Benchmark Contracts and Options Expiry: We're still three weeks away from the expiry of the benchmark contract and quarterly options. The impending auction break may drive speculators to unwind or roll their short positions, potentially driving prices towards or above 80€/t, especially if weather conditions remain favorable.