After closing 4 May at €84.67/t, European carbon steadily marched upwards throughout this week, before losing ground during Thursday’s session (11 May). The benchmark contract closed the week at €88.38/t, up 4.38% week-on-week.

Both Friday’s and Monday’s sessions (5-8 May) saw uncertainty as the market searched for direction. While settling higher both days, low volumes were traded on Monday as a result of UK traders’ absence due to the coronation. During Tuesday and Wednesday’s trading, EUAs steadily rose, following several failed attempts to breach support levels around the 200-day moving average. Following a weak auction on Thursday, prices dipped, marking the first red day for carbon in week 19.

This week the EU carbon market defied uncertain macroeconomic sentiment amidst news of German production decreases and the turbulence accompanying the United States’ looming debt ceiling deadline. On 10 May, the ECB raised interest rates by 25 basis points to 3.25%. This is lower than previous increases as inflation numbers improve, which may have spurred some optimism – although the balance between increasing rates and squeezing the European economy into a recession will continue to add uncertainty in the short-term.

Energy prices have remained depressed over the past week, despite a brief, early uptick. With the historic levels of gas storage and the lack of heating demand as we approach summer, there is no reason to expect this trend to turn around in the coming week. Carbon will likely follow macroeconomic and technical drivers.

Temperatures for the week ahead are forecast to dip by around 3C below normal later in the week before rebounding to normal levels. As Europe is currently in the shoulder season, temperatures are unlikely to have a major impact on thermal generation and by extension, carbon. German wind generation is projected to rise to slightly above normal early next week before falling to slightly below by the end of the week. Like energy, this is not expected to significantly impact EUA prices.

Commitment of Traders data published on 10 May is indicative of continuing broader macroeconomic uncertainty. Investment funds shed a further 3.4m in long positions while opening 2.6m in shorts. Cumulatively, investment funds are now net short by around 11m – a threshold that has not been breached since September 2022. Notably, however, the relatively even volume of closed long positions and opened short positions show that flight from the market has slowed and perhaps reached a nadir. Looking back at previous instances, this leveling out has been followed by a reversal. Due to the time-lag nature of the COT reports, the turnaround this week may correspond to this rebound (this will need to be confirmed by next week’s report).

Monday, 15 May will mark the release of the Total Number of Allowances in Circulation (TNAC) that will determine volumes to be withheld from EUA auctions and placed in the Market Stability Reserve (MSR) between 1 September 2023 and 31 August 2024. We expect Monday’s release will also include the first invalidation of allowances from the MSR. Even if these allowances are sitting in the reserve unavailable to the market, we cannot rule out that this will trigger a bullish market reaction.

Auctions for the week ahead will be supportive for European carbon. With no fortnightly Polish auction, no German auction, and a public holiday on 18 May, only 5.6 million EUAs will be brought to the market. This is down 6.2 million from the previous week. Normal auctioning will return in week 21. The public holiday one day before the weekend will likely mean less trading in the coming week.

After a bearish trend had been in place largely for the EUA Dec-23 contract since mid-April, a potential reversal signal was posted on Friday 5 May with an ‘inverted hammer’ candlestick. Friday’s session closed below both the 200-day moving average and €85.40/t level as the two previous sessions, but the candlestick pattern suggested a start to a possible trend reversal. The week started off with a small bullish candle which broke above the 200-day mva and closed at the €85.40/t level. The move on Monday seemed to bring confidence to the market resulting in a bullish session on Tuesday. Another bullish session on Wednesday brought the price up above the middle Bollinger band, but the bellwether contract lost momentum when getting close to the 100-day moving average. After briefly testing the 100-day mva and the €90/t level the EUA Dec-23 contract fell back and closed the day below the middle Bollinger band.

There seems to be strong resistance around the €90/t level, which coincides with the 100-day moving average and this suggests a neutral technical signal for the week ahead. To the downside we expect the €85.40/t level and 200-day moving average to limit any downward moves. If the EUA Dec-23 contract breaks above the €90/t area, the closest resistance levels that could limit the upside is then found at €91.54/t and €94/t levels.

The European Commission’s clarification on 2 May that REPowerEU will not entail the frontloading of extra volumes from the Innovation Fund in 2023spurred a short-lived price rally. This week, policy again ceded the position as price driver to technical analysis and macro-economic sentiment. 

The key carbon policy item going forward is the upcoming adjustment of the 2023 auction calendar, to allow for the 16.5 m extra volumes that the Commission wants to frontload from the member states’ 2027-2030 auction volumes. For that to start in July, the calendar needs to be updated in June, ideally earlier.

Further out on the horizon we can expect a series of delegated and implementing acts to hammer out lots of important ETS details, most notably on auctioning, the registry, the Modernisation Fund, and on the expansion to cover maritime emissions. In total, the European Commission plans for 16 acts on the EU ETS as such, and another 8 focused on maritime inclusion. Some are slated to appear in Q3 this year, most in Q4.

The revised ETS Directive and the new CBAM regulation were formally signed off on 10 May by the Swedish Minister of European Affairs (on behalf of the Council) and the President of the European Parliament. They will shortly be published in the Official Journal. The CBAM itself will enter into application in a transitional phase on 1 October 2023.

As for energy and climate policy more generally, the key remaining FF55 files are on renewable energy and energy efficiency. The former reached a trilogue conclusion on 30 March, with a target set for a 45% share (non-binding) of renewable in the 2030 energy consumption. The energy efficiency file was agreed in trilogue on 10 March, calling for a reduction of primary and final energy consumption by 11.7% at EU level. Both files now need to be endorsed by the Council and Parliament. For the renewable energy file two key dates have been set, with a votein the European Parliament’s ITRE committee in May, then a plenary vote in September.

The Swedish presidency will continue to push these and other ongoing files in the Council. Stockholm will also coordinate the member states’ reactions to the Commission’s proposal to reform Europe’s wholesale power market. Spain will eventually take over that process once it starts its presidency on 1 July.

In the European Parliament, the processing of power market reform file is coordinated by rapporteur Nicolas Gonzalez Casares, who is set to present his take on the Commission proposal on 12 May, followed by a discussion in the ITRE committee on 22 May.

The week ahead looks quiet on the policy front, with nothing directly related to carbon lined up.

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For European carbon next week, we have a neutral outlook for most drivers. As Europe is in the shoulder season, weather and energy will take the backseat to technical and macroeconomic factors. Macroeconomic sentiment remains uncertain in the face of a stagnant EU economic outlook, rising interest rates, and further risk as the US approaches the debt ceiling deadline. Public holidays next week will limit trading and auction volumes, adding support for carbon. Finally, the European Commission will publish TNAC numbers on Monday 15 May - likely to show the first invalidation of allowances which could lend some support to the market.

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Week 19: Lower auction volumes, TNAC numbers add support amidst ongoing economic uncertainty

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