SparkChange Carbon Market Monthly Report (December 2023)

December Developments:

• Whilst the price of EUAs was up only c4% in the month of December, that relatively benign overall result belies considerable volatility throughout the year-end period, as anticipated in November’s report
• EUAs started the month trading at a 13-month low of cEUR 70. Prices continued their downward trend, reading an intra-month low of cEUR 66 on the 14th of December, before embarking on a sharp, cEUR 12 rally to close the month at cEUR 78.
• The bearish fundamentals at play since Q2 2023 – significantly lower emissions y-o-y vs. increased EUA supply on the back of REPowerEU volumes – continued to stir up negative sentiment in the first half of the month. CoT1 Reports showed the record net short position in EUAs held by Investment Funds in November extend further, to a peak of 42mt as at 8th December.
• CoT data is published with a short lag however, and when the size of the short position was revealed on the 13th December, EUAs arrested their decline, in the context of future and option contracts also nearing delivery, and the primary auctions of EUAs coming to an end ahead of the Christmas break.
• Finally, long-term weather forecasts turning slightly colder was likely the initial trigger of compliance buying by Utilities, which left Investment Funds’ short positions extremely exposed in a context of no primary auctions and lower secondary liquidity over the Holiday period. This confluence of factors led to the short, sharp EUR 12 rally that took place over just 8 trading sessions, and left Investment Funds’ net short position halved to 20mt at year- end

Outlook

• On resumption of trading on 2nd January, the price of EUAs rapidly started to give up the gains seen in the late-December squeeze, setting new 17-month lows below EUR 65 by the 11th of January.
• In part, the fresh weakness has been attributed to forecasts of milder temperatures from late-January, and in general EUAs will continue to be influenced by winter weather conditions.
• Geopolitical risk is also a key factor to watch, especially if the escalation of tensions in the Red Sea leads to a delay in LNG supplies. That said, February TTF natural gas prices have broken below EUR 30/MWh for the first time in 5 months, reflecting the fact that gas storage levels are unseasonably high across the EU bloc.
• The first two primary auctions of EUAs in 2024 have settled at small premiums to low spot prices in the secondary market. Participants will continue to watch the auction results closely, as an indicator of compliance companies’ potential appetite to make use of low prices in securing future requirements, despite near-term demand that will continue to be weak.
• Price progression will likely continue to be closely linked to CoT data and the positioning of Investment Funds.

Key Events to Watch:

• 6th February – the EU is expected to table its proposed climate target for 2040, with implications for the speed at which the cap in EUA supply will be reduced going forward.

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¹ Commitment of Traders report published by the Intercontinental Exchange