EU carbon prices slide to two-week lows as net length builds

Carbon prices under the EU Emissions Trading System have fallen to two-week lows as weak fundamentals and trimming of long positions by traders weighed on the market, an analysis by S&P Global Commodity Insights found March 3.

This comes a week a week after the December 2023 EU Allowances contract rose to record highs of over Eur101/mtCO2e.

Prices have fallen almost Eur8/mtCO23 this week as technical signals weakened, leading to a trimming of long positions.

EUAs for December 2023 were trading at Eur92.60/mtCO2e at 1046 GMT on March 3, compared with earlier in the week on Feb. 27 when they were at Eur100.23/mt, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed EU Allowances for December 2023 at Eur93.38/mtCO2e March 2, the lowest since Feb. 14.

Mixed signals

Analysts have said net long positions were the highest since Aug. 22, which explains the pace of the recent price falls.

"It was clear then why long positions were taken, as investors sought short term profits from the reduction in EUA auction supply in the month, before moving to net short positions by mid-September (the price fell more than Eur30/mtCO2e in that time)," said a carbon analyst.

But expectations of colder weather could provide some support. Temperatures across northwest and southern Europe are expected to remain below seasonal averages for the week beginning March 7,according to CustomWeather forecasts.

The market is also awaiting full clarity on when the front-loading of EUA auction volumes will take place, though sources said it is unlikely before the second half of the year.

"There is a still a bit of colder weather to come, so the fall could be fairly slow and gradual, but the overall fundamental support remains weak -- a 15% increase in month-on-month auction volumes are due this month," S&P Global carbon analyst Michael Evans said.

"We now have additional REPowerEU volumes to begin preparing for, and coal to gas switching is still continuing (even though energy prices have appeared to move up a little (for coal, oil) in recent days," he added.

S&P Global analysts expect around 40 million EUAs to be brought to market this year, resulting in a bearish outlook for prices by October.

This comes as the European Council recently formally adopted the REPowerEU, which will provide more money for member states to raise through EU carbon allowance auctions.

This is bearish news for EUA prices as front loading of auction volumes adds more supply to the market.

S&P Global analysts now expect carbon prices to average Eur81/mtCO2e in 2023, an upward revision from their previous forecast, but values are set to fall in Q3 2023.