EU carbon complex beset by weak fundamentals, prices lowest since January

Carbon prices under the EU Emissions Trading System slid to four-month lows as meagre compliance-driven demand along with lower gas and power prices weighed on the market.

EU Allowances under the December 2023 contract were trading at Eur83.18/mtCO2e at 0953 GMT on May 26, a fall of more than 7% since May 19, ICE data showed. EUAs have moved in a Eur82-88/mtCO2e range this week.

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur82.76/mtCO2e on May 25, the lowest since Jan. 24.

Prices took a beating this week as demand could not keep pace with the auction supply even after a week of reduced auctions.

Sharp falls in gas prices are also resulting in more coal to gas switching signals, along with economic concerns over EU countries limiting significant short term investor demand.

The Dutch TTF month-ahead gas contract was assessed at Eur25.25/MWh on May 25, down 9.1% on the day, according to Platts, part of S&P Global Commodity Insights.

Bearish outlook

S&P Global carbon analyst Michael Evans expects more bearish pressure on EUAs in the coming months due to increased supply.

"Further bearish pressure [is] expected next month owing to a 15% month-on-month increase in auction supply, followed by a forecast further increase of 5% in July, assuming even distribution of auction volume brought forward to market this year under RePowerEU initiative plans," he said.

Analysts at carbon trading company Belektron said that after months of resistance, prices finally broke near Eur83/mtCO23.

"This might have happened due to alignment of several factors, such as mild spring temperatures, high levels of renewable energy production, especially wind, negative sentiment in major global markets and finally very low gas prices," they said in a recent note.

"Front month TTF has been trading sub EUR30 MWh for a few days already, making fuel switching from coal to gas more economical. Until those reasons prevail, it might be difficult to expect a recovery in prices, but rather continuation of a trend."

Analysts at S&P Global expect prices in July to average Eur84.1/mtCO2e compared to its 2023 forecast of Eur82.10/mtC02e.