European carbon inched down from Thursday 27 April to Thursday 4 May, shedding 1.6% week-on-week. On Tuesday 2 May, carbon jumped on a news story in Carbon Pulse that the REPowerEU monetization of EUAs will not entail extra volumes from the Innovation Fund (IF) in 2023. The existing auction calendar includes some 40 m EUAs from the IF spread out over the year on the auctions on the common platform (approximately 0.3 m each session). A European Commission communication in late March informed about a plan to bring an additional 16.5 million EUAs to market in 2023 by frontloading volumes originally set aside for member states' auctions in the years 2027-2030. Many market participants had priced in the possibility of additional IF volumes coming to market this year, hence the clarification that this source will be limited to the existing schedule of 40 m triggered a bullish price reaction. The EUA Dec-23 touched an intra-day high at €90.85, before settling at €88.41.

Prices dropped on Wednesday, as the attention shifted back to a weak macro sentiment. The ongoing quandaries of First Republic serve as a reminder of the potential fragility of the US and international banking system. Recent interest hike announcements by the U.S. Fed and the European Central Bank point to the difficult task of balancing the risk of a credit crunch with the need to curb inflation.

Friday and Tuesday’s auctions cleared at a small discount to futures prices, whereas Thursday’s session settled at a small premium. The bid-to-cover ratio ranged from a weak 1.88 on Tuesday to a strong 2.44 on Thursday.

The macroeconomic sentiment is set to continue being an important driver for carbon next week. Bar any positive surprises we expect the gloomy mood to prevail, as witnessed e.g. in oil prices falling over the week to $72.50/barrel on Thursday (4 May).

The commitment of traders data on various types of investors, from 28 April, showed investment funds reduced their long positions from around 33 m to around 23 m. Their short positions increased by 2 m to 28 m. Overall, investment funds are now net short 4.8 m, down 12.2 m from the previous week. This week marks the first time since 20 January that investment fund positions have been net negative. The exit from long positions reflects a resurgence in macroeconomic uncertainty stemming from the renewed tumult in the banking sector and is set to cast a shadow over carbon prices next week.

Now that the 2022 compliance deadline has passed, it’s time to watch out for the European Commission’s release of the Total Number of Allowances in Circulation (TNAC) that informs the functioning of the Market Stability Reserve (MSR). This report is expected in mid-May, but no definite date is set for its release. The TNAC calculation will decide the number of allowances that will be withheld from auctions and channeled into the Market Stability Reserve from 1 September 2023 to 31 August 2024. The forthcoming reduction in auction volumes, even if expected, could lend some support to the carbon market.

Unseasonably cold weather and low wind power generation would often be supportive, but, being in a shoulder season, there is little heating demand. We do not expect the weather to be an important price driver for carbon next week.

Next week will see a return to full EUA auction volumes, with the Polish biweekly session on Wednesday. A total of 11.85 million EUAs will be offered on auctions, compared to 6.8 million this week. Later in May we will again see reduced volumes, with no auctions on 18, 19, and 29 May.

After finding support at the €85.40/t level and posting a ‘doji’ candlestick on Thursday 27 April, Friday’s session was bullish. Monday 1 May posted a bearish candle but saw limited trading with only 1.8 million front-Dec allowances changing hands. The €85.40/t level again provided support on Tuesday and a strong bullish momentum mid-day brought the EUA Dec-23 contract briefly up above the €89.19/t, €90/t levels and the 100-day moving average but closed below these levels. Following Tuesday’s bullish candlestick, Wednesday’s session opened in positive territory, but the bullish momentum faded. The bellwether contract shed its previous gains, breaking, and closing below the €85.40/t level that has long been a strong support level, and also below the 200-day moving average. Yesterday (Thursday 4 May) the carbon price came down to the lowest level since 25 January but recovered somewhat and posted a small bearish candlestick.

The break of the €85.40/t level and the 200-day moving average could open further room to the downside towards €80/t. However, the hesitation to bring the price lower in yesterday’s session and today’s sideways trading could be an indication multiple support levels in the area €84.75/t-€85.40/t could keep the price from falling further. Given multiple support levels around €85/t we have a sideways technical outlook for the week ahead.

Last week saw the market move on changing expectations for Innovation Fund/REPowerEU allowance auctioning – a move that increases the bullish outlook for 2023. The week ahead is quiet for policy, without any market-moving events lined up. Policy as a driver is neutral for the week ahead.

On 3 May, it was reported that no additional Innovation Fund allowances would be added to auction volumes in 2023 to support the REPowerEU plan. Confirmed by the European Commission the following day, this provoked a short-lived bullish price reaction before the prevailing downward trend was reasserted.

from the Commission clarifies that 40 million Innovation Fund allowances will be auctioned in 2023 (as has been expected). It also indicates that an undetermined number of the revenues from that 40 million will be redirected to REPowerEU. Compared to previous expectations that 25 million Innovation Fund allowances would be brought to the market in addition to the 40 m, the news of lower frontloaded supply is bullish for the remainder of 2023.

Reports on the ongoing processing of the Carbon Removal Certification Framework (CRCF) suggest this instrument will most likely not open the door for establishing a removals market or including removals in the EU ETS. Some MEPs have called for this, but rapporteur Lidia Pereira seems dismissive of the prospect. Voting on the CRCF file in the ENVI committee will take place on 25 May.

The European Parliament will meet in plenary on 8-11 May, however, nothing related to the carbon market will be up for voting or discussion. Policy is set to be a very limited price driver for the week ahead.

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For European carbon next week, we see bearish signals from the uncertainties in the financial sector and generally weak market sentiment, as reflected e.g. in falling oil prices. Furthermore, fresh data on EUA holdings show that investment funds – a key group of market participants – have turned net short, a fact that will add to the downward pressure. On the positive side, we might see some support once the European Commission presents its calculation of the Total Number of Allowances in Circulation (TNAC), which will decide the number of EUAs to withhold from auctions and channel into the Market Stability Reserve from 1 September. Technical analysis suggests a sideways move next week. Despite the recent testing of the territory below €85, that level still seems capable of providing support. Overall, we have a neutral view for next week.

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Week 18: Bearish signals from macro set to hit against support at €85/t

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