All contents presented in this article are the private opinions of the author (Sebastian Lizak) and do not constitute an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse.
Current market situation
June 2024 saw significant declines in EUA prices, dropping to around €65 after three consecutive months of increases (in March, April, and May). The bearish scenario we outlined in our last market brief has materialized. The key factor was the significant breach of the €71-€72 level and the deepening of the downward correction that began at the end of May, reaching our predicted support level marked by the 50% Fibonacci retracement (€65). At the beginning of July, EUA prices rebounded above the €70 level.
The June correction in the allowance market did not follow the usual seasonal pattern – only one of the last eleven Junes saw a decline, with average increases of over 5.5%. However, the price drops are not surprising given the scale of recent gains – from the February low of around €51, EUA's increased by approximately 53% by the end of May.
Figure 1: Correlation between EUA prices (December 2024 futures) and TTF gas prices in Amsterdam
Source: Own elaboration using data from investing.com (accessed on July 5, 2024)
Fundamental Factors
- June was the first month this year that disrupted the correlation between EUA prices and TTF gas prices. This is clearly visible in Figure 1 (highlighted with a yellow rectangle). There are concerns about supply issues in the gas market in Q3 2024. Despite EU storage being about 76% full and on track to reach the 90% target well before the November 1 deadline, Platts forecasts that storage will be 100% full by the end of October, with gas prices expected to drop in Q3. However, real risks to these forecasts include Norway potentially shutting down up to 160 mcm/d of capacity for maintenance from late August to late September and potential disruptions in US LNG exports due to hurricanes. A slowdown in LNG deliveries to Europe in Q3, compared to current expectations, could hinder storage filling and drive up prices to compensate for volume shortfalls in the remaining summer months. If Platts' forecasts come true, the disrupted correlation between EUA and TTF gas prices might persist longer, provided EUA prices rise in the second half of the year.
- EUA prices fell following the results of the EU parliamentary elections, where right-wing parties won in most countries. Experts believe this could impact the pace of implementing the current EU climate policy. However, they emphasize that while the adoption of new climate policies might slow, reversing previously established legal commitments in the EU ETS is highly unlikely.
- Another bearish factor for June could be the return of financial institutions to opening short positions. According to Commitment of Traders (COT) data published by ICE, these entities increased their net short positions on EUA allowances from around 8 million to 18 million in June 2024.
- The ECB's expected interest rate cut in June should positively impact economic recovery in Europe. Although the PMI significantly dropped in June and remains below 50 points, the positive trend suggests that the recovery might continue, leading to higher CO2 emissions within the EU ETS.
- June 2024 saw a slight year-on-year increase in secondary spot market trading volumes (+9%). However, compared to previous months, there was a significant drop in volumes (from around 90-100 million to about 47 million). Looking at volumes from January to June 2024, there was an approximately 25% increase compared to the same period in 2023 (Chart 1).
Chart 1: Trading volumes on the emission allowances market (spot) from January to June 2023 and 2024
Source: Own elaboration based on ICE and EEX data
Technical Indicators
The short-term upward trend in the allowance market since February was disrupted when prices broke below the local low of €69. The correction intensified, halting only at the 50% Fibonacci retracement of the last upward impulse. Currently, EUA prices are testing the crucial technical resistance level of €71-€72.
The key question from a technical analysis perspective is whether the June declines will negate the upward trend that started in February. The overall technical picture suggests that the recent price drops were merely a correction within the upward trend. Supporting this view are several technical signals:
- Despite EUA prices being below the 9-week and 26-week EMA (Exponential Moving Average) on the weekly chart, they remained above the 12-month descending trendline. This support held from June 10 to June 24.
- The significance of the "golden cross" formation on the weekly chart, formed in May, increased as it was nearly negated in June. However, the EMA crossover did not occur in June or early July.
- In early July, EUA prices broke out from a bullish "flag formation," with a green candle featuring a large body adding significance to this breakout. The potential price target from the flag formation is around €95.
- Currently, EUA prices are between the important 50-day and 200-day moving averages. Technically, the bull market boundary is considered above the 200-day moving average.
- A potential inverse head and shoulders (H&S) pattern might be forming on the chart. Breaking the 80 EUR level (the neckline of the H&S pattern) could lead to price increases up to €105.
- Three out of nine indicators in our subjective EUA price trend barometer (Table 1) turned from negative to positive on the daily chart. Such numerous changes in technical indicators suggest that the downward correction might be over, and the upward trend could continue.
Chart 2: EUA price quotes (December 2024 futures) with support and resistance lines and a downtrend line
Source: Own elaboration using investing.com data (accessed on July 5, 2024)
Table 1: Subjective EUA price trend barometer (daily, weekly, monthly)
Source: Own elaboration using investing.com data (accessed on July 5, 2024)
Seasonality
Statistically, July is one of the weakest months for EUA price increases, according to the seasonal pattern. Over the past six years (2018-2023), EUA prices have mostly declined in July, with four consecutive drops from 2020 to 2023. The average decline during this period was about 0.1%.
Table 2: Monthly EUA price changes from 2018 to 2024 based on secondary spot market data (seasonality)
Source: Own elaboration based on ICE and EEX data
Scenarios for July and August 2024 (Bullish)
Similar to May, the €71-€72 EUR level will be crucial for EUA prices in July-August (but the condition is to stay above €65). This time, it serves as a resistance level, and breaking it could lead to a retest of the €78-€80 level established in May. Factors supporting this scenario include:
- Changing the emissions compliance deadline from April to September 2024 – increased demand for EUA’s in August and futures contracts expiring in that month is expected.
- Speculation on future allowance shortages in the market. History shows that the market prices in future shortages with about 1.5-2 years lead time (as seen in 2017/2018 and 2020/2021).
- The ECB's interest rate cut in June and the rising PMI index trend support economic recovery in Europe and higher CO2 emissions within the EU ETS.
- Technically, prices defended the local support level at €65 and remained above the 12-month descending trendline, with the golden cross formation intact.
- Positive change in technical indicators: three out of nine indicators we analyze turned from negative to positive.
- Continued growth in spot market trading volumes from January to June 2024 year-over-year (probably the accumulation of allowances by industry and ETFs).
