Investment funds continue to build length in European carbon, gas markets

Funds active in the European carbon and natural gas markets increased their net long positions further as EU Allowance prices tracked a bullish move from natural gas amid maintenance at Norwegian production facilities, news of the US stepping back from negotiations with Russia and further sanction packages from the UK and EU against Russia.

Funds held a total of 16.8 million EUAs in net long positions as of the week ended May 16, the latest data from the Intercontinental Exchange's Commitment of Traders report showed. This was an increase of 7.8 million, or 85.71%, week over week. Investors active in the market largely held on to gross long bets, holding 57.7 million EUAs, while decreasing gross short positions by 7.3 million to a total of 40.8 million gross short positions.

Investment funds also increased their net long exposure in natural gas TTF futures to 83.6 million lots in the week ending May 26, or a 6% increase on the week the latest COT report showed.

Gas, carbon rising

The increase in positions came as traders expect increased bullishness this summer as Europe builds its gas storage facilities, while rising cooling demand in Asia could heighten competition for LNG cargo procurement.

"I think that a lot of it boils down to China but the risk on the upside is much higher for the rest of the summer," a UK-based gas trader said. "Even when Chinese demand was 25% lower year over year in March and April, and Plaquemines' production was at record levels, we managed to get a good amount of LNG, but it was nothing crazy."

Platts, part of S&P Global Commodity Insights, assessed the June contract of the Dutch TTF at Eur37.155/MWh May 20, the highest value since April 3.

According to 1508 BST data from the Intercontinental Exchange, the June product fluctuated within a Eur37/MWh-Eur37.78/MWh range during the May 21 session and lastly traded at Eur37.3/MWh at 1510 BST.

European allowances have also been rising, settling 4.29% higher week on week as of May 16.

"I think people are looking at energy and seeing potential bullish risk in the near term, and I think that spills over to EUAs," a Europe-based trader told Platts.

Platts, part of S&P Global Commodity Insights, assessed the EUA nearest December 2025 contract at Eur73.34/mtCO2e on May 20, up 4.01% day on day.

"[TTF prices] primarily rallied due to the US stepping back from Russia talks and the peak maintenance in Norway today," said a UK-based carbon trader.

Total exit nominations from the Norwegian Continental Shelf fell to 159 million cu m May 21, down from 301 million cu m the previous day, due to planned maintenance on several assets including the 125 million cu m/d Troll gas field which is set to remain offline for the day, the latest data from Norway's Gassco.

Further driving prices, the UK and the EU announced major sanctions on Russia. The UK Foreign, Commonwealth, and Development Office announced May 20 that they will impose "100 sanctions targets across Russian military, energy, financial sectors." The EU also announced Russia sanctions on the same day, with the Commission's 17th sanctions package targeting vessels and further entities.

"[The increase in net long positions] is probably a risk measurement, not seeing it trade below Eur65/mtCO2e in the near term. We've hit a few resistance levels and Eur75/mtCO2e will be a key level going forward," the trader said. "Some volumes could come in at around Eur80/mtCO2e, but we're also looking at the Q2 and Q3 forecast, and Eur85/mtCO2e will be on the high end."

Other entities with stakes in the carbon market held stable positions week over week, with minimal readjustments. Investment firms held 358.4 million EUAs in net short positions, down 3.51%, or 12.2 million. Commercial undertakings increased net length by 2.11% to 266.4 million EUAs and operators with obligations upped net positions 1.45% to 73.2 million EUAs.

Meanwhile, in the gas market, commercial undertakings were the only ones to increase their short exposure, leaving them with a net long position of 79.25 million lots, compared to a net short of 163 million lots from Investment firms and Credit institutions.

UKA fund moves reflect linkage expectations

UK investment funds also increased net long positions in the market as of the week ending May 16. This came amid rising prices for UK allowances due to the expectations that the UK and the EU will link their emissions trading systems.

Funds active in the UK carbon market held a total of 19.4 million UKAs, increasing positions by 876,850, or 4.73%, marking a record length held by investors in the UK.

Platts, part of S&P Global Commodity Insights, assessed the UKA nearest December contract at GBP55.04/mtCO2e on May 20, up 4.86% day on day. Furthermore, the price rose 13.48% compared to the May 16 settlement, before the linkage agreement was announced.

"I think buyers will hold allowances for now, which will decrease demand," a carbon trader based in the EU told Platts, agreeing that the lack of clarity surrounding timelines may lead to an eventual drop in UKA prices.

UKA prices have since settled, trading at GBP55.22/mtCO2e ($74.04/mtCO2e) at 1335 BST May 21, according to ICE data.

"It is very dependent on how it will move ahead. If you see negotiations start again, there will be movement on the spread," a second EU-based carbon trader said. "If you see indications this will take time, you will see a widening of the spread again."

Investment firms increased their positions by 6.12%, or 2.6 million allowances, holding a total of 44.3 million UKAs in net shorts. Commercial undertakings held 22.5 million UKAs in net length, up 5.73% week over week or 1.2 million. Operators with obligations were net long at 2.3 million UKAs, down 500,910 or 27.86%.