EUA Prices in a Shifting Energy Landscape
A Deep Dive into the Forces Shaping Europe's Energy Market
European Union Allowances (EUAs) remained in a state of indecision this week, reflecting the broader uncertainties in the market. Traders watched as EUAs charted a week-long loss of 1.5%, nudged primarily by the gas market's faint-hearted behavior.
Simultaneously, the UK's auction schedule for 2024 was enough to galvanize traders there, making UK Allowance prices leap by 6.9% amid an environment of low liquidity.
The Weekly Play-by-Play
The week kicked off with depressed EUA prices. They plummeted as hopes waned for a surge in fossil fuel consumption come winter. Dec23, the benchmark contract, settled at EUR 80.80. The subsequent day painted an even grimmer picture with diminishing margins for coal-fired power plants throttling EUA demand, pushing the Dec23 contract to its bleakest in four months at EUR 79.50.
But hope rekindled on Wednesday with the unveiling of the Commitment of Traders (CoT) data. This good news story spurred EUAs by 2.5%, leading to a settlement of EUR 81.67 – a figure reminiscent of the heady days of late August. Unfortunately, Thursday came with a reality check. The Dec23 contract retracted most of the previous day’s triumphs, plummeting by almost 2%. Friday saw it stabilize, but still logging a EUR 1.20 loss for the week.
EUA DEC 23’ Contract (April 17th-October 9th) (Barchart)
Dissecting the Drivers
This week's EUA fluctuations were largely tethered to the ebb and flow of gas prices. With an impressive 86% correlation between carbon and the TTF contract, it's evident that energy markets are deeply intertwined. See my article on Carbon Market Correlation Here. For five consecutive days, we witnessed energy markets shrink, compounded by an upsurge in North Sea natural gas supply and an unseasonably temperate climate. The resultant softening of the TTF market clipped the wings of coal-fired power generation. With gas gaining the upper hand over coal, emissions dwindled, which consequently reduced the hunger for EUAs.
However, the waters were muddied midweek with a 2% uptick in the German cal24 contract, injecting some vitality into EUA prices. The external stimulus came from the CoT data, showcasing funds slashing their net short position by almost 3 million mt to 18 million mt. Market insiders perceived this as a vote of confidence in EUAs.
Yet, the lack of a lucid price trajectory remains a common refrain among analysts and traders. The overhanging clouds of a robust supply of nuclear and hydro energy, coupled with tepid industrial energy demand, have poured cold water on any bullish hopes for EUAs.
Forecasting the Horizon
Looking forward, a mild aura of pessimism continues to linger. The North Sea gas, back in action after last month's hiccup, combined with France's amplified nuclear energy production and prevailing mild weather, is likely to keep the EUA market subdued.
Furthermore, October and November are poised to showcase robust auction volumes, which is anticipated to further depress EUA prices. Yet, a potential wild card is on the horizon. Chevron, a heavyweight in the world of energy, is currently in the midst of a tug-of-war with its employees at two major LNG plants, Wheatstone and Gorgon, in Western Australia. Here's why this matters: these two facilities together make up a significant 6% of the world's LNG supply. But, right now, the focus isn't just on their production numbers. It's on the growing disagreement between Chevron and its workers.
Here’s The Rundown of Recent Events:
On Monday, Chevron made it clear they want to find a middle ground with the unions. They've reached out to Australia's Fair Work Commission for help in sorting out a few sticking points. These issues might seem minor to some – like how workers get paid back for travel and meals, or how they share living quarters on the offshore rigs – but they’re big enough to cause disputes.
But, even as Chevron was making these moves, the atmosphere got tenser. The unions, not waiting around, announced they’re considering going back on strike, giving Chevron a week's heads-up. This isn't a spontaneous decision. A while back, the unions paused their strikes thanks to an agreement put together by the Fair Work Commission. But now, they feel Chevron isn’t sticking to their end of the bargain.
On Chevron's side, they say they’re close to sealing the deal. They're on the brink of finalizing an agreement based on what was previously discussed. But here’s the twist: if things don’t move forward, Chevron has a backup plan. They could ask the Fair Work Commission to step in, make the final call, and end the strikes for good. They just need to give a week’s notice before taking this step.
So, why should anyone in the EUA market care about this?
Well, if the strikes in Australia pick up steam and disrupt the gas supply, it could push gas prices higher. And when gas prices go up, it has a knock-on effect, potentially boosting EUA prices. For everyone involved in the EUA market, from everyday traders to keen-eyed analysts, the drama unfolding in Australia isn't just a distant news story. It’s an unfolding event that could reshape the energy landscape, making the coming days crucial to watch.
As traders, analysts, and stakeholders grapple with this intricate puzzle, the coming weeks promise to be a period of keen observation and strategic plays.
