Since our previous weekly report, the benchmark EUA contract fell during the first two days before reversing course and correcting upwards for the three last sessions. EU carbon settled at €84.14/t by the end of Thursday’s trading (21 Sep), up €1.02/t (+1.2%) week-on-week.

Without decisive fundamental drivers, EUAs have been largely trading on technicals, however cuts to gas supply from an outage at Troll field in Norway prompted a bullish market reaction in the Dutch TTF front-month contract – a reaction mirrored by EU carbon.

Commitment of traders data released on 20 September for the preceding week shows investment funds increasing their short positions, albeit on a smaller scale than seen in the previous three weeks. Net length for this class of market participants decreased by 1.6m (now -21.8m overall) as 0.9m long positions 2.5m short positions were opened.

The most recent period during which funds were short to this level was ahead of carbon’s rally between 2 June and 14 June during which EUA prices rose from €78.99/t to €93.32/t. This does not necessarily point to a short squeeze; the 20 September options expiration taking place during the CoT reporting period adds uncertainty. However, a pattern has developed where short covering by this class of market participants has tended to add fuel to smaller price movements.

Next week will see a total of 14.6 m EUAs offered at governmental auctions. This is 2.9m more than the previous week as the fortnightly Polish auction will take place on Wednesday (27 Sep). The high auction supply may add downward pressure through the autumn.

Temperatures are forecast to dip over the weekend before warming to appx 18C midweek. The most recent forecasts indicate that the mild temperatures will persist, with central Europe facing a warmer October than usual, with less demand for mid-autumn heating.

German wind will remain below seasonal norms for the week ahead, dipping to appx. 4GW on Tuesday, before returning to norms by the end of the week. Solar production is roughly the opposite, reaching 10GW on Monday before falling in line with seasonal norms by the end of the week.

We will continue to see French nuclear capacity pick up. This week averaged 41GW while next week is forecast to increase to 46GW, however EDF estimates have repeatedly fallen short of expectations. Compared to this time last year, available nuclear capacity is up appx. 40%.

The CO2 switching price for 39% efficient coal to 50% efficient gas power plants is currently at €60.83/t for the front month contract. This is up €15.33/t from the previous week. The front-year CO2 switching price is currently €99.28/t (down €4.38/t).

The jump in front-month switching price stems from rising gas prices through week 38. Norway’s largest gas field, Troll, experienced early week outages. Other outages at Oseberg and Sleipner fields, though contributing far less than Troll, have kept supply cuts in the spotlight this week and added to gas’s rise. Despite the outages, this spike is not likely to persist. Arbitration has yielded results for the strikes impacting Chevron Australia’s LNG output. Union representatives indicate that industrial action has ceased as of this morning (22 Sep). In addition to the resumption of LNG flows from Australia, the updated forecasts of a warm October and gas storage at 95% all point to the gas market returning to what our weekly reports have repeatedly pointed out: gas to coal switch is unlikely until late-winter 2023.

With little to no heating demand expected, solar and wind generation having offsetting impacts, nuclear capacity continuing its halting improvement, and a normalizing gas market, technical indicators and participant behavior are the drivers to watch at the moment. All fundamental drivers are neutral for the week ahead. As indicated in the looking back section, there is upside potential if price movements force investment funds to cover short positions.

The EUA Dec-23 contract opened the week at €82.18/t and dropped during the day to post a third consecutive bearish candle. This led to further bearishness on Tuesday morning, but the EUA price recovered slightly during the day to close the session with a spinning top candlestick suggesting some indecision in the market. Wednesday session started with a further test of the downside with the EUA Dec-23 contact reaching the weekly low at €80.50/t. However, EUA prices reversed its direction over the course of the day and the front-year carbon contract recovered to climb back above the August low at €82.30/t. This led to further bullish pressure on Thursday especially since the EUA Dec-23 contract broke above the resistance level at €83.26/t (the low from 4 May). Today, the front-year carbon contract is trading higher again, currently oscillating around the low from March, at €84.75/t.

The EUA Dec-23 contract reversed its downward movement initiated at the end of August. EUA prices have bounced off the low around €80.50/t three times in September, suggesting a solid support at this level. Series of bullish candlesticks from this week might suggest a possible formation of the bullish momentum in the coming days. The MACD has also posted a bullish crossover this week. However, the EUA Dec-23 contract will mostly likely meet a strong resistance at the 50- and 100-days moving averages. A breakout above these levels is required for the sustained upward direction. Overall, we provide a neutral to slightly bullish signal depending on the break of the mentioned moving averages.

Climate and energy policy provided little direction to EUA trading this week, although it did affect carbon trading in the UK (see below). We expect policy to have little impact in the EU ETS also next week and see it as a neutral driver.

This week the European Parliament’s ENVI committee voted in favour of an opinion that effectively bans all nuclear technology from the scope of the forthcoming Net Zero Industry Act (NZIA). The ENVI committee’s opinion will be passed on to the energy committee (ITRE), which is lead on this file.

Today (22 September), member states’ permanent representatives (‘ambassadors’) meet in COREPER to discuss the EU position ahead of a joint Swizz-EU decision on amending some of the annexes to the Agreement between the EU and Switzerland on linking their respective ETSs.

In the UK, PM Rishi Sunak caused a stir on Wednesday, when he announced a U-turn on his net zero pledge for 2050. Among a series of adjustments, he pushed back a ban on the sale of new petrol and diesel cars from 2030 to 2035. He explained the move by pointing to his concern for vulnerable households. The announcement sparked a further drop in the UKA price.

On the global stage, the main event this week was the UN General Assembly High-level Week, which included a one-day Climate Action Summit. UN Secretary-General António Guterres urged world leaders to accelerate their efforts, for humanity to avoid entering the gates of hell. EU Commission President von der Leyen highlighted the EU’s target to cut emissions by at least 55% by 2030, and claimed the continent is on track to overshoot.

Next week will see a Council Working Party on the Environment in which member states’ environment attachés will discuss the EU’s preparations ahead of the upcoming COP28 climate summit in Abu Dhabi. So far, the EU has given no sign of bringing a new climate target to the table. Commission president von der Leyen made no mention of COP28 in her State of the Union speech last week.

The European Parliament is set for a quiet week on the climate and energy front. The next meetings of the ENVI and ITRE committees, and the next plenary session, are all scheduled for early October.

Slovakia will hold parliamentary election on Sunday 30 September. The main challenger, leftwing populist and former PM Robert Fico is leading the polls. He is campaigning on ending Slovakia’s military aid to Ukraine.

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We have a neutral view for the EUA Dec-23 contract for the week ahead. With Norwegian gas outages scheduled to end and a cessation in industrial action at the Chevron Australia’s LNG facilities, the volatility in the gas market will be less likely to impact carbon. New forecasts pointing to warmer temperatures next week and through October limit heating demand. Without clear fundamental direction, technical indicators and market participant behavior are more likely to drive EUA prices.