Week 24: EU allowances are showing some signs that the gas-driven rally may be running out of steam, as a rebound in Norwegian North Sea production relieves energy supply fears. The UK ETS also snapped its weeks-long winning streak as speculative buying took a breather.

Carlton Carbon data for the week shows that EUAs fell by €2.71 (3.66%) to €71.39 through the week, mirroring a 3.26% drop in month-ahead TTF gas benchmark values over the same period. Softening energy sentiment and profit-taking by recent buyers triggered a downward trajectory over the five sessions.

In the UK, carbon allowances slipped by £1.17 (2.41%) to £47.44, ending an almost seven-week run of consistent gains that saw prices approach £50 for the first time since October. The discount versus EUAs narrowed by £1.13 (7.93%) to £13.24, its lowest point since March 14.

The latest exchange data for the week to May 31 showed investment funds, the driving force behind the price recovery, continue to build a record long position on the basis that UKAs are undervalued. Speculative investors added a further 1.7 Mt to their holdings, taking it to 6.6 Mt in total.

Moves to normalize the relationship with European allowances are being built on fragile foundations, however, and reminders of a fundamentally oversupplied market balance are never far away.

The UK ETS Authority published its annual Emissions and Surrenders Compliance Report for 2023 late on June 7, showing that verified in-scope emissions fell by 12.5% on year.

“The cumulative effect of years of net-excess allowance sales can’t be ignored or addressed overnight, especially with reserve UKAs coming to market through 2027. We remain sceptical of a lasting recovery while hopes are pinned on market reforms being announced following a possible change in government post-July 4. The UK will auction 2.76 million allowances June 12,” says Carlton Carbon.

In the EU, TTF gas price fluctuations remain an important proxy for carbon values.

News that repairs have been completed at Norway's offshore Sleipner platform have boosted output back up to around 325 Mcm/d, and generally taken some of the pressure off that had built up throughout the spring maintenance season. Some lingering works will carry on, but production is scheduled to have a fairly clear run until significant curtailments begin again at the end of August.

Behind the local supply concerns are bigger fears concerning the availability of LNG, given heatwaves are already gripping south and east Asia. LNG imports into the region are sitting above the five-year average as a result, with prices holding at six-month highs as buyers work to pull cargoes away from other importing regions like Europe.

Also, news over the weekend of conservative and far-right victories in the European Parliament elections, to the detriment of the Greens, looks like it may be causing a bearish knee-jerk reaction so far today, but the likelihood is that Ursula von der Leyen is able to garner coalition support to stay on as Commission President for another term.

With the driving force behind the Green Deal remaining at the helm, it is unlikely that existing climate policies will be reopened for debate, but the new Parliament profile may dampen or slow down future ambitions. Specifically, ETS related, there may be a change in approach to the MSR and ETS Directive reviews, but those aren't taking place until 2026.

“It is all conjecture at this point and trading focus should soon shift elsewhere to more pressing and relevant short-term matters,” says Carlton Carbon. “Overall, we see the potential for a flattish week ahead around €70 on variable renewables generation, a slightly shorter auction schedule, and the ever-present possibility of geopolitical risks playing a role. Technical signals look more bearish than neutral, though, and funds increasing their net short position [slightly] to 8 Mt means bold support levels in the high €60s could be tested.”

Outlook

  • Carbon price outlook - neutral
  • EUAs begin to lose ground as gas pressure eases
  • Rebound in North Sea gas production partially offsets LNG supply concerns
  • Investor net short position bounces off seven-month low up to 8 Mt
  • EU Parliament election results in new skew towards centre-right
  • UKA investor demand loses steam just shy of £50
  • Record net long position grows to 6.6 Mt
  • UK ETS verified emissions fall by 12.5% during 2023
  • Asian LNG imports at top of five-year range on cooling power demand
  • Norwegian North Sea gas output recovers to 325 Mcm/d
  • EU gas storage 72% full (up 3%), UK 43% (flat)
  • EU auction schedule at 11.1 million allowances, down 2.3 Mt
  • UK to auction 2.76 million allowances June 12