Weekly Carbon Trading Market Update - 14th December 2015

MARKET DEVELOPMENTS

EUA carbon price closes the week at €8.07, down 5.2% (44c) week-on-week Largest price fall on Friday compounded by a weak auction Long term uptrend broken Clean dark spreads strengthen as power falls less than coal and carbon COP21: agreement reached on how to limit global warming

AUCTION OVERVIEW

8.655Mt comes to market this week in three auctions (Mon, Tue, Thur) Last week of auctions in 2015 before Christmas shutdown Next auction on 11th January, 2016, 17.259Mt comes to market that week Weekly auction volumes will be higher next year as only 200Mt backloaded in 2016 vs 300Mt in 2015 EUA PRICE ACTION

The EUA price briefly fell back below €8 last week before closing the week at €8.07, a week-on-week fall of 44c (5.17%). We hinted at bearish conditions in last week's market summary because the market couldn't rise even with relatively bullish conditions but we didn't expect a big move like this. The last time the December 15 contract traded below €8 was at the end of September. The high of the week came on Monday at €8.53 and from then on the momentum was downwards as each day traded lower than the last and settled lower than or equal to the previous day. The largest fall came on Friday, prices fell in the early morning, exacerbated by a weak auction. For the market to fall so much so fast means that the market had been positioned long and the failure to reach new highs caused the exit of some of those positions and the fall then precipated more selling as longs sought to protect themselves against losses. As ‘stops' were triggered prices fell with increasing speed. The bottom was found at €7.93 and small bounce saw a close at €8.07. As a result of Friday's large falls the clean dark spreads were boosted considerably as carbon and coal fell more than power. Stronger CDS's would ordinarily induce utility demand however it wasn't enough to stem the tide of nervous longs rushing for the exit. Price Impact: as highlighted last week the failure to break new highs created a bearish tinge to our outlook. The fall was caused by speculators as the fundamentals are supportive of price. We don't yet know if the weak longs are all flushed out, therefore calling the next price move is difficult. The outcome of all of this price action just ahead of the auction shutdown is to increase the probability of more volatility, see the ‘week ahead' section below for more details.

Paris COP21: agreement reached to limit temperature to 2 degrees rise or lower. Conference of the Parties ("COP") number 21 is now finished with negotiations hailed a success as agreement was reached on how best to limit global warming to below 2 degrees. It took until Saturday evening for the talks to be finalised and the deal agreed. As forecast in our previous weekly, COP 21 has little or no immediate impact on the EU ETS and so for brevity we do not dwell on the vagaries of international climate negotiations in our weekly. There are numerous sources that are analysing the outcome, however we feel that Bloomberg has highlighted the 5 most relevant points in the text, their excellent (and thankfully brief) summary can be found here.

THE WEEK AHEAD

Volatility is the word. With such large falls experienced at the end of last week, the direction the market takes next is difficult to call. The fundamentals say we should be higher but speculation has caused price to drop considerably. If there is more volume yet to be flushed out of the long-side speculators then, coupled with weak demand at the remaining auctions, the price will fall further. Counteracting this, the CDS is getting stronger with every EUA price fall and utillty demand will increase as well as some additional industrial compliance buying as companies look to true-up year-end requirements and take advantage of the price falls. With no auctions after Thursday (for more than 3 weeks) the current demand and supply balance causing price falls could be easily and rapidly tipped the other way because in the absence (or at least drastic reduction) of length held by speculators there is little to dampen any year-end demand. With this in mind, if you are short then take advantage of the discount as the lack of auctions will make it harder to buy until 11th January and if you are long keep an eye on those other speculators.