EU carbon prices jump over Eur90/mt, buoyed by higher gas complex

Carbon prices under the EU Emissions Trading System have been trading near two-month highs as investors continued to take large net short positions, with higher gas prices supporting the wider complex.

EU Allowances for December 2023 rebounded above Eur90/mt, and were trading at Eur91.38/mtCO2e ($100.12/mtCO2e) as of 1128 GMT June 16, up 4% since June 9, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur93.32/mtCO2e on June 14, the highest since April 19.

After weak fundamentals gripping the complex in May, investors have changed strategy, by almost doubling their net short positions and pushing prices by around $15/b in two weeks.

Gas rally

A huge jump in European gas prices has also contributed to the strength in carbon.

Prices on the Dutch TTF gas contract, the European benchmark, rose by almost 25% this week, driven by a range of bullish factors such as summer maintenance at plants in Norway and competition for LNG from Asia.

This rally added significant volume to daily demand, supporting higher prices.

"Into July, upside pressure may be maintained through combination of financial investor demand, and cooling demand for power from Northwest Europe," said Michael Evans, lead carbon analyst at S&P Global.

Analysts at carbon trading company Belektron said aggressive moves in gas prices were adding to the bullish momentum.

"It seems that markets remain very sensitive and even a period of relatively low prices might not be very long lasting, due to risk of gas supply, warm weather and unreliability of renewables," they said in a recent note.

The spread between UK and EU carbon permits also widened significantly to around $25/mt amid soft demand and policy uncertainty over UK ETS reforms.

UKAs for December 2023 were trading at GBP59.78/mtCO2e ($76.57/mtCO2e) at 1122 GMT on June 16, ICE data showed.

With the discount of UKAs to EUAs now below the structural premium in UK generator carbon costs, UK is expected to export power from July onwards, according to analysts at S&P Global.

In addition to acquiring UKAs, UK power generators have to pay the Carbon Price Support, currently pegged at GBP18/mtCO2e, giving the sector a structural premium over EU generators.