EUA Dec17: The weakest performer of the energy commodities in 1H2017

EUA price development

In 2017 and in 2016, the benchmark carbon contract had a similar start to the year. As auction volumes were not cut by back-loading anymore, January started with steep losses and the price fell to 4.62 euro. The price then stabilized near the 5 euro level and rallied at the end of February when the European Parliament and the Council elaborated their positions on the reform of the EU ETS and both were more ambitious than the European Commission. The benchmark contract hit a local high at 6.02 euro 2 March, a level not seen since then. The price was declining continuously until mid-May when it hit a 2017 low at 4.29 euro. Hopes on progress at the second trialogue meeting about the reform of the ETS and forecast about a very hot June lifted the price back above 5 euro by the end of the month of May. The price however got under pressure in June, after the cancelled second trialogue meeting. All in all, the price lost 23.4% in the first half of the year which might seem shocking at first sight, but is still a better performance than in 2016 when the benchmark contract almost halved its price by falling from 8.29 euro end of 2015 to 4.47 euro by the end of June 2016. The volume weighted average price of the EUA Dec17 was 5.00 euro in 1H2017. Less than 1.5 billion allowances traded in the December contract, a decline of 28.2% from 1H2016. And while the open interest of the EUA Dec16 stood at 529,063 end of June 2016, the open interest of the EUA Dec17 was 425,273 on the last day of June 2017 (-14.5% y/y).

Energy fundamentals

The EUA was the worst performing instrument in the first half of the year within the energy mix. While the EUA Dec17 lost 23.4% in the first six months of the year, the German front year power was stable (+2.2%), the European 2018 coal contract appreciated by 1.9% and the UK first season gas price dropped by 3.9%. Brent was the only commodity in the energy mix that fell significantly in the first half of the year, as the OPEC agreement was not enough to restore the balance in this oversupplied market. Source: Bloomberg, ICE

Data indicate urgent need for reform of the EU ETS

After several rounds of meetings, discussions and votes the European Parliament and the Council elaborated their positions on the reform of the EU ETS. Both institutions showed willingness to increase the ambition of the reforms as they support increasing the linear reduction factor to 2.2% and would keep it under review to increase it during phase 4. There seems to be a broad agreement also about doubling the intake rate of the market stability reserve to 24% in the first 4-5 years of its operation to pump out the surplus from the market as soon as possible. They also proposed the cancellation of millions of allowances, a new idea compared to the original reform suggestions of the Commission. There is however still disaccord about the free allocation, the carbon leakage protection and the use of the different funds. The legislators try to consolidate their amendment proposals in trilogue negotiations. The next meeting takes place 10 July and the Estonian presidency of the Council calculates with several other meetings to finish the file in 2017. Negotiations are led by a new rapporteur, Julie Girling who took over from Ian Duncan as latter was busy with his campaign in the UK general elections. Complying with its obligations, the European Commission published in May the total number of allowances in circulation. According to this, there are 1.69 billion allowances available in the system, meaning that even with a withdrawal rate of 24% it would take years for the market stability reserve to make this surplus disappear. The Commission also informed that verified emissions of the stationary installations in the EU ETS fell by 2.7% in 2016. The emissions of aircraft operators, on the other hand increased by 7.9% in a yearly comparison. Due to one erroneous verified emissions figure it seemed at first sight that emissions were reduced more significantly, but the data were corrected shortly and they revealed that the surplus is still huge. Source: Bloomberg, ICE, Vertis Ltd.

Summer outlook: Relaxing on the 5 euro level

While June was characterized by above seasonal average temperatures (and therefore higher air-conditioning use and higher power prices), July temperatures are forecast to be in line with the seasonal average with some colder days. Any additional power demand can be covered comfortably by renewable output. As the most recent data showed, Germany increased its renewable power production to a record 35.1% in the first half of the year. This can keep a cap on the CO2 price in the next period. The halved auction supply in August and the probably accelerating political negotiations about the reform of the system however could support the price. Historically the EUA price tends to remain stable during summer months. Source: Bloomberg, ICE

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