SparkChange Carbon Market Monthly Report (January 2024)

January Developments:

• European carbon has made a very weak start to the year, with the EUA price declining by 19.8% over the course of January.
• The sell-off was most aggressive at the start of the month, with EUAs falling 12% from the year-end price of cEUR 77 to settle at cEUR 63 by Friday, 12th January. Thereafter, the EUA price has largely traded in a relatively tight cEUR 3 range between EUR 60 and EUR 63, albeit prices have dipped below the psychologically important level of EUR 60 on a few occasions.
• Bearish fundamentals persist on the demand side – low emissions due to sluggish economic output, increased renewable output, and gas displacing coal in the merit order – whilst supply-side headwinds – increased EUA supply from REPowerEU, the inclusion of Maritime emissions – continue to weigh on the fundamental balance. The incremental weakness since the start of the year has been attributed to forecasts for a mild end to the winter, gas prices that have continued to fall, and the activity of investment Funds. Geopolitical flare-ups and events on the Red Sea have added to volatility.
• ICE Data has shown that Investment Funds built a record net short position in EUA Futures – c40mt – to mid-December 2023. This net short position roughly halved to year-end, likely as a result of risk management over a seasonally volatile period as opposed to a changing fundamental view, but has built back to c33mt over the course of January, adding to the weight of weak compliance demand.

Outlook

• Despite the stark weakness in the EUA price in the first two weeks of the year, prices have been largely stable in the cEUR 60 – 63 channel since then.
• Analyst consensus forecasts, updated in year-ahead outlooks, have fallen markedly in the near-term – 2024 EUA price consensus now stands at cEUR 71, 25% down vs. this time a year ago. At the same time, the constructive outlook to 2030 is relatively unchanged, with consensus forecasts pointing to an EUA price of cEUR 140. That conflict between near-term pessimism and longer-term optimism seems to be causing some tension in the EUA price at today’s levels. In that context it’s worth noting that whilst Investment Funds’ positioning in EUA Futures – typically used for shorter duration positions – are increasing, at SparkChange we have seen an increase in units in issue in our ETC of close to 45% since late-November.
• With no catalyst on the immediate horizon to change currently bearish fundamentals, the EUA price is likely to be rather sentiment-driven, with focus on the near-term triggering fresh downside, and focus on the long-term triggering recoveries. The evolution of the gas price (on fundamental or geopolitical grounds), as well as any surprises in mid-term weather forecasts may add to volatility.

‍

¹ Commitment of Traders report published by the Intercontinental Exchange