EUA: Analyzing a Week of Bearish Fundamentals
Dec24 EUAs Plummet to a 23-Month Low Amid Bearish Market Dynamics and Regulatory Shifts
Last week, the European Union's carbon market experienced significant volatility, culminating in the December 2024 European Union Allowance (EUA) contracts hitting a 23-month low. On Friday afternoon, prices dropped to EUR 58.20, driven by a confluence of bearish factors including mild temperatures, an uptick in wind energy supply, and tepid demand from the power and industrial sectors. Despite the downward trend, dip buyers provided a safety net, preventing prices from falling further, particularly for EUAs priced below EUR 60, which attracted the attention of compliance entities.
The trading week saw the Dec24 EUA price range fluctuating by EUR 6.25, with moderate traded volume and significantly lower open interest compared to the fourth quarter of 2023. As full auction volumes resumed amidst an ongoing bearish sentiment, the market braced for potential further declines. The benchmark contract eventually settled at EUR 58.79, marking a stark weekly loss of EUR 4.61 (7%).
Weekly Price Movements
The week opened on a bullish note with Dec24 EUAs reaching a high of EUR 64.45 on Monday morning. However, the optimism was short-lived as prices plummeted, tracking a weakening in the TTF gas market, and eventually settled at EUR 62.67.
Tuesday offered a brief respite, with EUAs climbing to settle at EUR 63.58, a 1.5% increase, largely influenced by gas prices. Yet, Wednesday reversed the gains due to aggressive selling, with the Dec24 contract closing 1.8% lower at EUR 62.41.
Thursday witnessed the week's lowest price point at EUR 60.26, as above-average temperatures reduced energy market pressures, leading to diminished demand for carbon allowances.
The trend of strong selling persisted, driving prices down by 2.6% to settle at EUR 60.78. The week concluded with the Dec24 contract experiencing its largest daily decline in over two weeks, settling 3.3% down at EUR 58.79, following the largest auction discount observed on Friday.
Market Drivers and Regulatory Developments
The bearish trajectory was influenced by significant regulatory updates, including the European Commission's proposal for a 2040 emissions reduction target of 90%, aiming to limit total EU emissions to 750 million mt of CO2-equivalent by 2040.
However, the lack of mention of the EU ETS in this proposal led to market disappointment. Further compounding the bearish outlook were adjustments to the Fit for 55 reforms, pushing back the deadline for surrendering EUAs and altering the issuance schedule for 2024 allowances, which could impact Q1 prices negatively.
The Commitment of Traders (CoT) report revealed a slight increase in investment funds' net short positions, but this had minimal impact on market prices. Auction dynamics also played a critical role, with discounted auctions contributing to price volatility throughout the week. Notably, the absence of a Polish auction, reducing weekly supply by 17%, failed to shift the bearish sentiment.
Trends and Key Developments
As auction volumes increase this week from 10.75 million to 13.06 million EUAs, the market remains cautious. The interplay between bearish fundamentals and potential buying at lower price levels suggests a continued volatility.
With the energy market showing mixed signals and carbon prices closely tracking movements in the TTF contract, stakeholders are closely monitoring upcoming auctions and regulatory developments for cues on future price movements. As it adapts to these evolving conditions, the balance between supply and demand, along with external market influences, will be crucial in determining the direction of EUA prices in the near term.