Monthly EU ETS Report – October 2018

EUA prices snapped a 17-month winning streak in October, losing nearly 23% as the market tumbled from €21.21 on September 28 to close at €16.36 on October 31. In euro terms, it was the largest monthly drop in ten years.

On the way down the front-December contract set a new volume record on Ice Futures, with screen trades totaling 576 million EUAs, as traders scrambled to unwind profitable positions.

Most of the damage was done in the second half of the month, as the pace of profit-taking increased following the Carbon Forward conference in London. At the event, senior traders and analysts warned of increased volatility between now and the end of the year as speculators managed massive options exposure, a significant price drop in December, while price forecasts ranged between €25-40 in 2020, and €17-29 by 2030.

The market came away from the conference with the sense that the year’s bull-run was well and truly over, and this triggered a slump in prices starting from €19.27 on October 17 (the first day of the event), representing about two-thirds of the monthly loss.

Timespreads had also enjoyed a strong performance in the previous two months, with the December 2018-December 2019 spread wideing from €0.27 in mid-August to €0.98 two months later. This took the implied cost of carry well beyond the market norm, and traders increasingly sold the spread on the basis that they could finance the carry trade internally much more cheaply.

After mid-month, however, spreads began to shrink as outright prices retreated and buying interest at the wider differentials disappeared. This opened up a profitable buying opportunity for those traders who had shorted the spread, and by the end of October the December 2018/2019 differential was back below €0.30.

There were political headwinds too. The Polish government called for EU intervention in the market, saying that prices had reached a level where additional EUAs could be injected into the market. However, only Romania voiced any support, and as the month ended the “trigger” point for intervention seemed further away.

Continuing uncertainty over Brexit continued to underpin the market, with the UK government issuing an advisory note to business on what may happen in the event of a “no-deal” Brexit. Coupled with statements by the Energy & Climate Minister Claire Perry, there seems to be a growing sense that the UK’s long-term objective, “no-deal” Brexit or not, is to set up its own emissions trading system and link it to the EU’s market.

In the meantime, a no-deal outcome would see UK industry paying a new Carbon Emissions Tax of £16/tonne, while the present Carbon Price Support will continue at £18/tonne. Numerous observers pointed out that this may mean UK industry would get a “free pass” in the first quarter of 2019 if the UK crashes out of the EU with no deal, as the tax would only take effect from April 1 2019.

ALLCOT

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