EU ETS Market Report – November 2018
Carbon prices ended the month of November at €20.50, a gain of 25% from the closing price at the end of October. Screen trading volume in the front-year contract on ICE Futures totaled 432 million EUAs.
The market kicked off November by dropping to €15.10, its lowest level since July, as speculators continued to unwind length following the retreat from September’s ten-year highs.
But prices recovered very quickly to the €18.00-20.00 channel, and daily trading range steadily narrowed into a band between €19.20 and €20.50, representing the 38.2% and 61.8% Fibonacci retracement levels of the drop from September’s high to the November low.
Coincidentally at the centre of this band is the critical €20 level that is increasingly being viewed as the centre of gravity for the December futures market. Earlier in the year open interest in the December €20 call option was the highest of all strike prices, though open positions have tumbled as the contract expiry approaches.
Trading activity has become increasingly dominated by hedging activity around the outstanding €20 call options, and this was reflected in November’s increasingly narrow price band.
Energy fundamentals have also helped support carbon prices. German calendar 2019 baseload power gained 8.9% over the month, while calendar 2019 API2 coal declined 6% and TTF calendar 2019 gas edged up just over 1%. The result was a clear shift in favour of coal-fired generation and therefore demand for carbon.
By mid-month the calendar 2019 clean dark spread had risen to its highest levels so far this year as coal prices declined from the low $90s/mt into the mid-$80s/mt. At the same time, the clean speak spread continued its steady improvement, rising from around -€3.00/MWh at the start of November to around -€1.00/MWh by the end.
Traders believe EUA price volatility will pick up again over the first two weeks of December, as options hedging shifts into high gear as the expiry of the contract takes place on 12 December.
Preceding the option expiry is the much-anticipated vote in the UK Parliament on the negotiated WIthdrawal Agreement. At present, the odds appear to favour a rejection of the deal, and therefore an increased risk of a “hard” Brexit on March 29 next year.
This implies that UK installations may begin to either sell surplus EUAs, or shift their portfolios to registry accounts in other EU member states in anticipation of that date, as UK access to the EU registry will likely be stopped at the end of March.
Numerous participants have suggested that a significant sell-off is unlikely since many of the largest installations are affiliated to EU entities and will threfore simp[ly transfer their allowances across the Channel. However, there remains a strong possibility that some selling will take place.
The final major market event of the year is the expiry of the December futures contract on 17 December. Open interest in the benchmark is currently 413 million EUAs, the lowest it has been on November 30 since 2012.
General expectations are for prices to begin to recover after the holiday season, with some forecasts calling for levels in excess of €32 during the first quarter of 2019. Much will depend on how soon German auctions resume and on the UK government’s response to the Brexit vote in Parliament.