Rallying gas boosts EU carbon prices; UKAs continue to decline

European carbon permits hovered above Eur70 metric ton per CO2e, buoyed by rallying European gas prices,

EU Allowances were trading at Eur70.25 metric ton per CO2e ($76.81/tCO2e) at 1409 GMT on Aug. 9, compared with a settlement price of Eur70.58/tCO2e on Aug. 2, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed EU Allowance contracts for December delivery at Eur71.06/tCO2e on Aug. 8.

Gas, equity markets

EUAs were heavily influenced by European gas and global equity markets, as the latter were hit by an aggressive sell-off earlier in the week.

EUAs dipped more than 2.5% on Aug. 5 but after the aggressive sell-off, equity markets rebounded, boosting a rally in natural gas prices and carbon.

With the recent rally, some traders said that both the carbon and gas prices were overvalued, and they are waiting for the prices to come down before building more long positions.

"EUAs are overvalued and Eur60/mtCO2e is more fair value in my opinion," said a UK-based carbon trader. "As utilities are not emitting anywhere near as much as they were, output is lower. The demand is not there."

But some said demand was resilient despite a fairly well supplied auction calendar in August.

"Ongoing security of supply concerns continue to support a bullish energy narrative and the impact is being felt particularly by gas and LNG markets as developed economies move away from coal," analysts at Carlton Carbon said.

"Still robust primary market demand, no additional REPowerEU allowances in the September-December calendar update, a tighter weekly auction schedule and warmer than normal temperatures will also likely shore-up EUA sentiment."

EUAs correlation with European natural gas has strengthened to two-month highs, with the correlation between EUA and TTF front-month for one-month period rising to 0.81, significantly higher than the 0.29 in the prior month.

"If you see tensions really spiraling into conflict in the Middle East or Russia-Ukraine, then gas can get spooked and carbon is going to rise," said an UK-based gas trader.

Platts assessed the benchmark Dutch TTF August-delivery gas contract at Eur40.115/MWh Aug. 8.

Commenting on the entry point, traders said that Eur60/mtCO2e could potentially be a popular level.

Analysts with Commodity Insights noted that electricity demand in August had moved from neutral to bullish amid rising power demand from Southern European countries.

UKAs decline

UK carbon permits were less affected by the global equity market sell-off but due to bearish fundamentals, prices were down from the previous week.

UKAs were trading at GBP37.50/mtCO2e ($48.02/tCO2e) at 1408 GMT Aug. 9, compared with GBP38.82/tCO2e on Aug. 2, ICE data showed.

Platts, part of Commodity Insights, assessed the UK Allowances nearest December at GBP38.59/tCO2e on Aug. 8.

Trading activity was stronger compared with the prior week. The average daily trading volume was at 1,963 futures contracts, up 7% from the previous week.

Analysts with Commodity Insights said electricity demand was bullish amid rising consumption due to a drop in electricity bills for both households and the industrial sector.

"We expect end-user demand to average 2% year-on-year uplift in the second half of 2024, supported by the uplift in data center consumption as well as lower retail costs," analysts said in a recent note.