Week 12: Recovery cut short by banking crisis, part two

Looking back

Over the course of last week (Thursday-Thursday), carbon futures recovered some of mid-March's heavy losses, observed up until Friday 17 March, when the EUA Dec-23 contract flattened out at €87.29/t. Prices seem to have been buoyed by macro-economic relief after the last-minute rescue of Credit Suisse over the weekend, and after the US Fed's decision, on 22 March, to raise interest rates by a quarter-point, in line with what was expected.

On Monday (20 March), carbon briefly tested the downside of €85, before settling back above €87. Carbon rallied on Tuesday (21 March) to just below €90, then took a sideways breather on Wednesday (22 March), before continuing the uptick on Thursday, to settle at €92.58/t, up €5.51 (6%) week-on-week.

As for the primary market, the five most recent auctions (including Wednesday’s special session for aviation EUAs) showed normal values. Bid-to-cover ratios came in between 1.94 and 2.49, and clearing prices were in line with or slightly below the secondary market. The exception was Tuesday’s auction of 2.4 m on the common EU platform, which cleared at €87.14/t, a 35-cent premium to the futures price.

The European energy complex saw relatively modest movements over the week. The TTF front-month gas contract settled Thursday (23 March) at €43.19/MWh, down €1.16 (3%), whereas the gas front-year settled sideways at €51.28/MWh. German power inched up week-on-week, as the Cal-24 baseload contract settled on 23 March at €142.55/MWh, up €6.92 (5%). The coal API 2 front-year contract settled at $128.55/t, down €3.73 (3%).

Looking ahead

Next week there is nothing coming up in the EU ETS itself that should push prices one way or the other. Auction volumes will be at 11.8 m, the normal size for the odd-numbered weeks that include Polish auctions. The March option contracts expired this week, and pre-expiration buying was probably another supportive factor. The March-23 futures contract will expire on 27 March, we do not expect this to affect prices. We might see some EUA buying ahead of the 30 April compliance deadline but reports from this week suggest needs are limited.

From ICE’s latest Commitment of Traders data, we can see that investment funds have liquidated 8.4m in long positions while gaining 3.6m in shorts. From the previous week’s level of 20m, the net length fell around 59% to 8.4m. Largely as a response to a looming banking crisis and broader macroeconomic turmoil, Commitment of Traders data for the coming week will be key to watch to assess if this ‘risk-off’ behaviour continues from speculative investors. Today concerns over Deutsche Bank’s credit default swaps triggered a deep drop in banking shares across Europe. This will probably reinforce investors’ risk-off sentiment next week and might trigger more EUA selling by speculators.

The weather forecast for central Europe sees temperatures creeping down to around 5° C on 28 March, well below the seasonal average of 8 degrees. This has been predicted for some time and should largely be priced in. The most recent forecast, from 24 March, is marginally warmer than the previous one and should act as a neutral price signal for carbon next week. As for wind, the latest forecast suggests slightly stronger-than-average wind generation next week, except for a calm day Wednesday. Overall, we see the weather sending a neutral signal for the week ahead.

French nuclear capacity is set to increase slightly, from 38 GW this week, to 39 GW next week. This sends a slightly bearish signal for carbon.

Technical outlook

Last Friday (17 March) ended the week with the fifth consecutive bearish candle. However, with Friday’s short candlestick body appearing against Thursday’s long body, the two sessions resembled a ‘bullish engulfing pattern’ which could signal a reversal. Monday’s session briefly tested the area below €85.40/t and hit the lowest level since end-January. Carbon then recovered and closed above the 100-day moving average and posted a long-legged ‘doji’ showing indecision on the further direction. A reversal came on Tuesday when the 100-day moving average provided support. The upward move was limited by the neckline from the ‘double top pattern’ at €91.54/t and closed below €90/t. On Wednesday trading was relatively narrow and ended with a small bearish candle. This was followed by a bullish session breaking above the €91.54/t neckline, the 100-day moving average, and the €91.98/t (a previous all-time high from December 2021).

Today, 24 March, the EUA Dec-23 contract opened higher than the previous close when the upside was limited by €94/t level. Since late morning, it has slipped markedly, tracking losses in energy and equities triggered by the Deutsche Bank sell-off. Carbon has broken below several support levels and is currently trading around the 100-day moving average (€87.70/t).

With this week’s price movements, the technical picture has shifted from bearish to sideways. There seems to be some hesitation in bringing the price above the €92/t level and this could also limit the upside next week. To the downside, the €85.40/t level could keep the price from moving lower, but if this is broken, we could see the price test the 200-day moving average currently at €84.50/t. Lower is the January low at €77/t likely to support the carbon price. Overall, we provide a sideways technical outlook for the week ahead.

Climate and Energy Policy

We see policy remaining neutral this week. With the possible exception of government action to shore up the financial stability of struggling banks (which would be a supportive signal), policy will not drive prices for the week ahead.

On Monday (20 Mar), the European Commission proposed to extend the gas reduction adopted in July 2022 to bolster the security of supply amidst Russian disruptions to gas flows. The measure establishes a voluntary 15% EU-wide gas reduction target with a mechanism for this goal to become mandatory under crisis conditions. The gas market balance will be important for EUAs during the year ahead – gas savings, LNG supply flows, weather impacts on energy generation, and rebounding industrial demand will be important to watch during a year in which policy will likely take a back-seat to energy in comparison to 2022. Read more in our analysis here.

On Thursday (23 Mar), a deal was reached on FuelEU Maritime as a result of interinstitutional negotiations. The legislation aims to encourage uptake of renewable and low-carbon fuel in shipping, as well as establish new targets for the emissions intensity of energy usage for ships above 5000 gross tonnage. While a separate legislative file, the goals align with the inclusion of maritime emissions in the EU ETS, with the market providing an economic incentive to improve efficiency and FuelEU Maritime providing the regulatory ‘stick.’ Each will apply to emissions from voyages within and between EU ports, as well as 50% of emissions from voyages between EU and 3rd country ports.

In several key files, progress has been slowed by interests from specific member states. For the Decarbonized Gas Market and Hydrogen Package and the Renewable Energy Directive (RED), French nuclear interests (leading a coalition of interested states) have put the brakes on – with interested parties asking for pink hydrogen (hydrogen created through the use of nuclear energy) to be recognized. Similarly, the German government has thrown a last-minute wrench into the works for the provisional agreement to phase out the sale of combustions engine vehicles by 2035.

Week ahead events:

Policy is neutral for the week ahead. Nonetheless, there are a few meetings that may be interesting to watch for carbon market participants.

ITRE will, on Monday (27 Mar), be presented with a slew of proposals including the Critical Raw Materials Act, the energy package for gas (including the directive and regulation shaping Europe’s market for green hydrogen), the Net-Zero Industry Act, and delegated acts on methodologies for Renewable fuels of non-biological origin. See the agenda here

On Tuesday (28 Mar), the Transport, Telecommunications, and Energy Council will attempt to reach a general approach on the gas and hydrogen package (as will be discussed in ITRE). Once agreement is reached, the Parliament will need to reach a position before trilogue negotiations may begin.

The Council will also begin debate on the Commission’s proposal to reform the EU’s electricity market design. Finally, the Council will attempt to reach an agreement on the Commission’s proposal for voluntary reduction of gas demand for Winter 2023/24. The agreement reached in July 2022 to reduce demand and ensure the security of supply in the face of Russian shortages will expire on 31 March unless the legislation is extended. See the link to our recent analysis above. Here's the agenda for the Transport, Telecommunications, and Energy Council meeting.

Tuesday will also see the Parliament’s ENVI committee take up and endorse the trilogue agreement on aviation under the EU ETS. The final Parliamentary approval will likely take place with the rest of the EU ETS files in the 17-20 April plenary session.

The European Parliament will meet in plenary from 29-30 March, however, the agenda shows nothing directly or indirectly connected to the EU carbon market.