July Developments:
- As the market navigates the ongoing tug-of-war between bearish near-term fundamentals vs. a more bullishmid- to long-term price outlook, European Carbon traded a relatively tight range in July of cEUR 63-70. The month’s closing price of cEUR 68 is only c3% down from June’s closing price.
- Investment Funds continued the trend from June to increase their net short position by c20% compared to last month at a little over 25mt vs a February peak of 39mt. However, long positions also went up, meaning there was#a c12% increase in aggregate positions in EUA futures.
- The bearish near-term fundamentals continue to be driven by both low demand for EUAs (sluggish economicoutput and decrease of CO2 intensity of power generation), as well as supply-side short term factors with EUAsupply temporarily inflated by REPowerEU.
- That said, this tight range in Carbon price also swallowed the free allocations “bulge” that in contrast to previous years, did not take place in February and March, but more recently in late June/early July with the EU confirming c85% of allowances handed out by 25th of July.
Outlook:
- Up until this year, the compliance deadline for emitters to surrender their allowances has been 30th April. In 2024 the compliance deadline shifts to 30th September. As a result, August will not see the typical 50% reduction in EUA auctions, in case there are (likely) corporates that are yet to secure all the EUAs they require. We will follow closely whether the typical seasonal strength around the compliance deadline will develop.
- With regards to the tug of war of bearish short-term fundamentals vs a bullish mid- to long-term outlook, the change in compliance deadline may tip the balance in August/September.
- The likelihood of an August squeeze might be reduced given full auctions (less impact of technical factors).
- The risk of a compliance deadline squeeze in September is present, albeit reduced by the fact that some allowances have already been handed in. and,
- It seems unlikely that we will see an extreme summer heatwave; the risk of renewable disruption is lower with hydro reservoirs well-stocked and river water levels high.
- However, any squeeze derived by weather events, seasonal demand, technical factors or a mix of them would nonetheless likely be exaggerated by Investment Funds’ net short position: We have never entered August or the compliance deadline with Investment Funds as short as they are (4-month high of c25mt).