European carbon declined sharply over the week, after falling through a key technical support level around €85/t on Wednesday, which spurred further losses on Thursday. The EUA Dec-23 contract posted a 7.6% drop week-on-week from Thursday 18 - Thursday 25 May. While some bearish pressure was expected from the return to full auction volumes this week, the underlying reason for the downward move seems to be the falling front-month gas price, which keeps pushing coal out from the power mix thereby reducing the need for EUAs.

On Friday 19 May the EUA Dec-23 contract tested the upside, peaking at €90.21, before closing flat at €89.88/t. On Monday, carbon futures slid throughout the morning, and fell further after the auction, despite it clearing at an 18-cent premium. The Dec-23 contract then recovered somewhat and settled at €87.76/t. Carbon continued to slide on Tuesday, alongside declining gas prices, and settled at €85.50/t, just above the confluence of several key technical support levels.

On Wednesday, a new test of the downside took carbon to €84.55, before settling at €85.15, just below the 200 days moving average. The breach of this level did not spur an immediate further drop but paved the way for a strong downward pull, on Thursday morning, when carbon reached €82.63, then settled at €82.99/t, down €2.16 day-on-day, and €6.86 week-on-week (down 7.6%).

There was no EUA auction last Friday (19 May), but a normal schedule this week, including the 2.68 m Polish session on Wednesday (24 May). Clearing prices came in between €81.12/t on 25 May, a 28-cent discount compared to the secondary market, and €85.20/t on 22 May, an 18-cent premium. The bid-to-cover ratios were between 1.66 (24 May) and 2.26 (22 May).

The European energy complex weakened considerably over the course of the week, led by declining gas. The front-month TTF contract lost another 14.5% over the week (after having lost 14.9% last week). Front-month gas was trading below €25/MWh on 26 May, its lowest level since May 2021. Solid storage levels, ample deliveries, and gloomy economic data weigh on demand. The front-year TTF gas contract has also come down, by 5.7% week-on-week, and is now trading at around €47/MWh, more than e20 above the front-month contract.

Coal and German power were both down 6.7% over the week, while Brent crude was unchanged.

With the latest development in fuel prices, the CO2 switching price for 39% efficient coal to 50% efficient gas power plants is currently at €25/MWh for the front-month, far below the EUA price. This suggests coal-to-gas switching should be running at full speed, which will exert strong bearish pressure on EUA prices. Further out for the front-year, the CO2 switching price also softened somewhat, to €11/MWh, suggesting coal-burn to still be in the money in the winter months.

Fresh data showing that the German economy is in recession after two consecutive quarters of recession adds to the prospect of limited demand for EUAs.

The EUA auctions next week will be limited to the common European platform on Tuesday and Thursday (no auction on Monday, which is Pentecost), plus the German auction on Friday. While the calendar should be well known, we might see carbon futures taking some support from the limited volumes offered in the primary market. 

The latest weather forecast (26 May) suggests higher than normal temperatures next week in central Europe and slightly higher than previously predicted. Yet, peaking at 19.5 degrees Celsius on 2 June, there should be limited need for cooling. Wind power generation is expected to be below the seasonal average, while PV generation is set to be slightly higher than normal. Overall, the combined renewable generation should have little impact on carbon prices.

The latest production notices from EDF indicate a brief capacity drop in early June, to around 32 GW, before climbing back to current levels of around 37 GW, and then to above 40 GW towards the end of the month. While this has been known for some time, it might still lend some support for carbon.

The latest weekly data on the Commitment of Traders (CoT) show that investment funds have reduced their short positions on EUA futures. In early May, this group of carbon traders shifted their position from net-long to net-short. While this was more because of scaling back on long positions than building short ones, it nevertheless caused some bearish pressure. The recent CoT data should soften possible fears that short-selling might trigger a general rout in European carbon.

Friday 19 May the EUA Dec-23 contract tested the area above the 100- and the 50-days moving average but came back below these levels and posted a ‘shooting star’ candlestick signaling a bearish reversal. A crossover of the 50- and 100-day moving averages was also a bearish signal. The reversal was confirmed on Monday when the bellwether contract posted a large bearish candle. Another day in red followed on Tuesday. Tuesday’s downward move was limited by the 200-day moving average and the €85.40/t. After some hesitation on Wednesday, the session ended below the 200-day moving average. In addition to the break, the carbon price got another bearish signal with the MACD crossover. The break of the 200-day level opened room to the downside and the EUA Dec-23 contract continued its decline on Thursday, posting a large bearish candlestick.

The technical outlook is bearish with the significant break of the 200-day moving average, the bearish MACD and 50- and 100-day crossovers. The lower Bollinger band could limit the speed of the downward move. Psychological support could come from the €80/t mark and lower is the January low at €77/t.

For the week ahead, there are no policy events that will have a direct impact on the EU carbon market. Policy as a driver remains neutral.

This week, EU member states’ ministers held a first round of discussion on the Commission’s proposal for a Net-Zero Industry Act (NZIA) during a competitiveness council meeting on 22 May chaired by the Swedish presidency. One of the controversial points is whether the text should call for a ‘technology neutral approach’, i.e. language that would leave room for nuclear.

The European Parliament’s ENVI committee voted on Wednesday (24 May) for amendments to the Industrial Emissions Directive. The legislation in question has the objective of regulating emissions impacting health and the environment by promoting the best available techniques for industrial activities. The Commission proposal seeks to extend sectoral coverage to large-scale farming and mining. During Wednesday’s vote, ENVI supported amendments to decrease the stringency compared to the Commission’s plan by reducing the number of installations (and farms) that would have been included. A plenary vote on ENVI’s amendments is scheduled for early June. As the Council has already adopted a position, the following step would be interinstitutional negotiations.

In June, the European Commission will decide whether to extend the emergency interventions in the energy market that were agreed upon among the soaring gas and power prices last autumn. Member states were allowed to cap prices, tax the windfall profits made by power generators, and funnel that money back to households and industries. By default, the emergency measures will expire in June. This week, economy commissioner Paolo Gentiloni warned member states’ governments that extending the special energy hand-outs beyond 2023 would threaten Europe’s fiscal balance.

Overall, policy remains quiet concerning the carbon market. With only tangentially related legislation being addressed, no market impact is expected for the week ahead.

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After a period of remarkable resilience, carbon came down this week, crashing through the 200-day moving average, a key technical support level, which has opened a wide room to the downside. We attribute the move mainly to weakening short-term gas prices that are pushing coal out of the fuel mix, and to this week’s return to full auction volumes. Fundamentals and technicals both suggest continued downward pressure for the week ahead. Adding the news of Germany being in recession, we see a clear bearish signal. On the bullish side, we see relatively weak auction volumes (no session on Monday or Wednesday) and an expected brief drop in French nuclear generation. These two elements might provide support, but overall, we have a bearish view of the week ahead.

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