February saw the EUA market reach its highest price in more than 6 years, with the December 2018 futures contract trading intraday at a peak of €10.27. This gave rise to considerable speculation over whether new speculative traders had entered the market, though there appears to be little evidence to support this.
Prices ended the month at €10.10, a gain of 8.8% from the closing price at the end of January, and up 23% from the start of 2018. February was the tenth successive month in which prices increased, the longest-ever winning streak since the market started.
The market was given a boost by the formal approval by the European Council of the EU ETS reform package on February 27. The updates to the market include the doubling of the MSR intake rate to 24% for five years from 2019 as well as the invalidation of most EUAs in the MSR from 2023.
The month of February saw the emergence of seasonal compliance buying, and a number of analysts and participants noted that market behaviour is beginning to shift as the beginning of the market stability reserve grows ever nearer.
Industrial companies that have previously been happy to borrow EUAs from the following year’s allocation, or dip into their bank of surplus EUAs from previous years, to complete their compliance are now beginning to buy in the marketplace, traders say.
The great uncertainty over price movements in the next couple of years has prompted these companies to hold their surplus in reserve, sources say. If the operation of the MSR does indeed drive prices to €15 and beyond, as many say it will, then those freely-allocated EUAs will have a greater value and generate greater savings in a higher-price environment.
Rumours of new speculative traders – banks and hedge funds – entering the market have been circulating since the start of the year, but it’s hard to see where they have been active. Open interest in the December 2018 contract has risen from 462 million EUAs on January 2 to 476 million EUAs on February 23; hardly the sort of increase that one would associate with new entrants building up long positions.
Further along the curve, the same is true; there is no open interest in outright EUAs after December 2022, and OI in the front half of the curve has risen only modestly. However, these reports of new participants persist, and given the price movement since December they are hard to ignore.
March will see the annual compliance cycle reach its peak, as installations complete their verification of 2017 emissions and submit the data to the Commission. The overall results will be published in early April; with industrial output rising in 2017, there is a chance that overall emissions will have risen, although this rise will have been offset by further growth in renewables.
The recent bout of very cold weather has undoubtedly led to an increase in emissions from the power sector, but this influence will only be felt in the 2018 verified emissions, due in a year’s time.