Carbon Weekly Newsletter

This newsletter was published 7.1.2021, 13:43 pm CEST time.

The current prices on the European carbon market are as follows:

2021 started on a positive note with fresh all-time highs. Bullish momentum from 2020 continues and colder weather forecasts coupled with a lack of daily EUA auctions provides a strong backwind for prices. Auctions will not restart until January 29. Around 710 million EUA are planned to be auctioned in 2021 according to the calendar but this number will get reduced after Market Stability Reserve absorbs excess EUA from the market. The amount will be known after May 15 when European Commission publishes the exact number of allowances to be placed in the reserve. Options market shows that participants are expecting further price increase in 2021. Open interest on all maturities is heavily in favour of calls that extend all the way up to 75 EUR/EUA. Although there is only 2 million EUA of open interest there, there is a hefty 28 million at 50 EUR/EUA. Important levels follow every 5 EUR lower, so 45, 40, 35, 30. At 45 EUR/EUA there is around 11 million EUA of open interest, and each lower price level adds around 10 million EUA of open interest until 30 EUR/EUA. With around 42 million EUA of open interest at 30 EUR/EUA, this is currently the most active strike level. 2021 will be an interesting year as we head into the new year with the highest futures open interest of the last 5 years on top of the record trading volume achieved in 2019 in front year futures.

EUAs have closed the year 2020 with a 34% return. Although this is already an impressive number, it is only possible to present the immense volatility by looking at the moves that unfolded throughout the year. The range from the lowest to highest point was 134%. Year started fairly calm, but things escalated quickly as the unfolding global pandemic started to have a very negative impact on almost all assets prices. In mid-March, EUAs dropped by around 40% in less than two weeks, to reach a bottom on March 23 at 14.34 EUR/EUA. This was just shortly after EUAs saw the biggest daily drop of 16% on March 18. This was also the day of the biggest daily volume, where 90 million EUA traded on ICE on Dec20 contract. Central banks around the world tackled the pandemic effects by offering almost unlimited amount of liquidity to the market. This was enough to turn the markets around and spark an unprecedented rally in global asset prices. EUAs followed as well and posted the highest daily gain of 14% on April 6. Prices were mostly trending up after that and reached a fresh all time high mid-July. After such a big gain prices then corrected down by 26% in the next 3 months. At the beginning of November, a new rally started and persisted all the way until end of the year. High of the year was reached on December 28 at 33.50 EUR/EUA, according to front year futures prices. Out of 258 trading days, 126 of them showed a positive return, while on 132 days EUAs lost value. On average, prices gained 2.6% on the up days and lost 2.1% on an average down day.

Price development of EUA Dec2021 futures contract

 

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