Carbon Quotas and German Electricity influenced by geopolitical pressure
Carbon Quotas Prices
The last blog post ended by noting that the EUA prices are expected to stay below EUR 60/t due to downward pressure. However, what we saw was a significant uptick in prices for the Dec 24 EUA contract.
The rise started with carbon prices hitting a two-week high at EUR 64.10/t as a mix of geopolitical pressure and fundamental factors tightened the market. An analyst noted that overall the fundamentals have not changed much, and prices were expected to fall as long as Iran's retaliation of the Israeli bombing of its consulate in Syria does not lead to strong escalation.
Further, on the 12th of April, the Dec 24 EUA hit a three-month-high of EUR 71.75/t, and later that week EUR 74.90/t, the highest since the 8th of January. The main drivers behind this shift were energy fundamentals, particularly gas prices. With carbon prices being linked to gas and power, the reports of Russia's attacks on gas storage facilities and power plants in Ukraine triggered an increase in gas and power prices, and thus an increase in EUA prices. With European gas prices remaining almost 17% higher than on the 10th of April, concerns over energy market shocks have intensified due to Russian attacks on Ukrainian gas facilities and Middle Eastern tensions. It seems the market is expecting prolonged conflict and consequently supply disruption.
Speculative investors increased their net short positions to just over 25m tonnes in the carbon market last week. However, the price increase in the energy complex due to geopolitical pressures prompts participants to reconsider their short positions. This week, investment funds cut their short bets on carbon to 24.8 m tonnes. The cut was only marginal, despite the sharp price increase.
Analyst Monna Dimitrova said that the recent movements in the market have been exaggerated and that the market most likely will absorb the external macroeconomic shocks, but it is not expected to bring prices back to February lows any time soon. Montel writes that in the coming weeks, EUAs are expected to trade above the EUR 65/t threshold.
German Electricity Prices
“When it goes up, everyone wants to buy. The spiral spins upwards,” - Montel trader
In the last update, there was little that indicated that power prices would rise short-term given strong fundamentals and low demand. However, as with carbon prices, the geopolitical pressures from Russia's attack on Ukrainian power plants and tension in the Middle East have had an uptick effect on power prices.
On the 10th of April, the front-month contract traded at EUR 56.70/MWh. The correlation between power, gas, and carbon has been strong recently, one trader pointed out. Later, on the 12th of April, the front-month contract had risen to EUR 61.81/MWh amid prices reacting to heightened political tensions, causing gas shortage fears carbon prices surge. Lower LNG exports from the US, Russian attack on Ukrainian infrastructure, and upscaling tensions between Iran and Israel have driven prices upwards. The uptick in EUA prices provides further bullish momentum. If there is a reduction in the number of gas-fired power plants operating on the grid due to gas shortages would necessitate an increased demand for EUAs for coal-fired generation.
Previous this week, the front-month power contract reached EUR 71.36/MWh on the EEX, hitting its highest level since February 1. This spike was attributed to rising geopolitical tensions in the Middle East, which raised concerns about potential impacts on energy prices. Analysts noted that the upward trend was evident across gas and carbon markets as well, exerting further pressure on power prices. Later, the front month dropped to EUR 66.15/MWh, moving away from its recent peak. Analysts pointed out that prices had reached technically overbought levels without fundamental justification for further increases. Political developments were cited as the primary driver of prices, with traders anticipating a potential decline if geopolitical tensions did not escalate further. If there is no further escalation, one trader said the front-month contract is expected to drop back to EUR 60/MWh.
References:
https://montelnews.com/news/8b2d280d-a6d7-4d63-a201-d771b466bc27/carbon-euas-eye-16-weekly-gain-amid-gas-short-squeeze
https://montelnews.com/news/de91a15c-d3d7-49b5-98f5-8012c29c7a3b/carbon-jumps-5-to-hit-new-3-month-high-amid-short-squeeze
https://montelnews.com/news/2727c075-af51-4229-bf29-9bc65427502b/carbon-prices-track-nervous-gas-to-eye-2-weekly-loss
.PNG)
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