EU ETS Monthly Report – January 2019

The carbon market’s strong rally into the end of 2018 came to a sharp stop in January, as EUAs failed three times to breach the September high of €25.79. The December 2019 futures contract ended the month down almost 11% from the December 31 close at €23.30.

The extreme volatility of the fourth quarter, mainly the result of options hedging, gave way to a slightly calmer environment, though traders were quick to exploit opportunities to drive prices higher mid-month. The failure to top the existing  ten-year high then triggered selling as speculative traders liquidated positions.

The market was also characterised by a growing flow of bearish news and sentiment. The ongoing trade disputes between the US and various countries appears to be making itself felt in worsening economic prospects: US and German business confidence took a knock this month, while the US Federal Reserve displayed a new-found caution in its interest rates policy, preferring to hold rates stable and wait for further data.

Fundamentals in the carbon market also shifted this month. In 2018 coal-fired power was the more profitable choice in the benchmark German market, but as the new year started, natural gas prices have fallen back amid plentiful global LNG supply, and this has rendered gas-fired power competitive for calendar 2020 and 2021.

Coal prices, too, have not helped. API2 calendar 2019 coal prices rose into the $90s in October last year, but fell back to the low-mid $80s quickly after that, and there has been little reason for them to rise since.

As a result, utilities are reluctant to sell forward power from coal plants, and this has damped demand for EUAs. There may also be an element of reduced demand ever since RWE announced that it was financially covered for carbon until 2023: other utilities will no doubt have followed suit.

Weather has also been a factor in January. Temperatures have not dropped to significant below-average levels, and this has hurt demand for heating. The weather outlook for February is still fluid, but there remain chances of a prolonged cold snap, meteorologists say.

Supply in February will be boosted by the resumption of weekly German EUA auctions, which will increase total February availability to 51.6 million EUAs compared to 38.8 million in January.

Despite the additional auction supply, there are some participants who hold a slightly bullish outlook for the month, however. Analysts calculate the market balance as short by more than 10 million EUAs in February, which could boost prices. At the same time, compliance buyers will be on the look-out for opportunities to buy cheap carbon, and this may mitigate downward price potential.


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