SparkChange Carbon Market Monthly Report (May 2024)
June 11, 2024
May Developments:
- European Carbon rallied for the third consecutive month in May, recording a c8% gain. The EUA price closed the month up c43% from the February lows, with the price of cEUR 72 being down just c6% YTD.
- Geopolitical risks eased somewhat through the month of May, as tensions between Israel and Iran seem to have deescalated, and annualised volatility in the EUA price has started to retreat from the 21st May reading of c38% that represented a 19-month high.
- EUA price fundamentals continue to be sluggish. Not only is the demand for power at a low ebb, but the generation mix continues to skew heavily to clean sources, whilst the residual thermal generation that is required, is predominantly delivered by cheap gas. Overall, the emissions intensity of the EU’s power generation has continued to fall from a FY 2023 record low of c244 gCO2e per kWh, to a YTD average of c213.
- Nonetheless, we continue to see market participants showing willingness to look through the near-term oversupply of EUAs to a tighter future for the EU ETS in 2026 and beyond. This is playing out most acutely in Investment Fund positioning1, which saw the net short position held by Investment Funds reach a 7-month low of c7mt, down c83% since the February peak. This reversal of sentiment has been triggered both by a significant reduction in absolute short positions, as well as long positions expanding to a 14-month high.
Outlook:
- As we have long argued, we are rapidly approaching an inflection point in the balance between EUA supply and demand, where the EU ETS flips from small surplus in 2024 to material deficit in 2026 – 2030. Whilst near-term fundamentals remain weak, on balance the longer-term focused bulls have been in the driving seat for the last three months, testing the resolve of the shorts as that inflection point edges closer.
- With summer on the horizon, eyes will be drawn to weather developments as the EU ETS is now much more sensitive to heat waves than winter cold snaps. If we see a hot summer – as some long-term forecasts are starting to point towards – that triggers disruption of hydro and nuclear generation similar to that which we saw in 2022, there’s scope for the remaining shorts to be squeezed further, potentially exacerbated by the September compliance deadline.
- If the European summer instead plays out as the British one has started(!), there’s a chance we see one final pullback. Investor conversations would suggest that any such pull-back might be short-lived however, with many waiting for such a pull-back as an opportunity to build long-term positions in EUAs.
