European carbon ended the month at €7.37, a gain of 6.2% from the end of September, boosted by strong advances in German calendar 2018 power and API2 coal.
Trading activity was down in September, with 255 million EUAs changing hands in the front year contract on ICE Futures, a drop of nearly 18%.
Coal prices were the root of the gains this month, with Asian prices advancing due to labour disputes and re-stocking in China and India. The increase fed through to API2 prices, which gained 7.6% over the month.
This rise also supported firmer German power prices, and the cal-18 baseload contract added nearly 7% over the month, ending at €36.71/MWh, the highest close since February 2014.
Despite firmer power and coal prices, the clean dark spread continued to decline, and the erosion of this fundamental support may play a role once utilities have covered their increased demand for winter.
Nonetheless, carbon was pulled higher over the first half of the month and reached a 21-month high of €8.05 as speculative traders piled in. The gains were immediately reversed as traders took profit, and the second half of the month saw a 11% drop.
However, with the prospect of a conclusion to EU ETS reform talks in early November, as well as uncertainty around the EU’s proposal to ban UK EUAs from January next year, saw the market rally at the very end of the month.
The outlook for November is seen as firmer: a successful deal on the post-2020 reforms will drive speculative buying in the first week of the month, and while a slight pull-back is expected once an agreement is reached, there remains the prospect of a tighter market in the short term due to the ineligibility of UK permits.
Britain has suggested a two-year extension to its market participation as part of a transitional Brexit deal, but the approval of the so-called “Brexit amendment” by the EU council in October suggests that the bloc is persuaded that the UK will pursue a “hard Brexit”.
The triggering of the amendment would invalidate UK permits from January 1, leaving the UK outside the market. EU-27 installations lose access to the 62 million free allowances and 106 million auctioned permits that the UK issues each year.
This may provide the market with a short-term uplift, since the UK’s energy sector has a sizeable surplus after emissions have fallen sharply in recent years.