Market brief (March 2024)

Current market situation

In February 2024, EUA prices recorded their second consecutive month of decline, reaching values of around €54 on the spot market (-12.5% compared to January). Compared to prices in the December 2023, this represents a drop of around 30%. At the beginning of March this year, however, there was a short-term recovery to levels of around €58.5 (spot) and around €60.5 (futures). This may have been due to higher TTF gas prices, which have been closely correlated with EUA prices for some time, and a so-called short squeeze in the futures market.

EUA's have been in a strong downtrend since around April 2023, driven by very weak fundamentals of low market demand and high supply:

DEMAND

• Economic stagnation in the EU: declining industrial production and energy demand, resulting in declining emissions in the EU ETS in 2023: power generation (approx. 20-23%), industry (approx. 6-7%),
• Decarbonisation of power generation and fuel switching: increased use of renewables & nuclear power & significant reduction in coal use for power generation (decrease in TTF gas prices).
• Decrease in EU ETS hedging.
• Postponement of the EU ETS compliance period for 2023 emissions from April to September. (5 months more for buying EUA's)

SUPPLY

• An increase in the supply of REPowerEU allowances between 2023 and 2026 (assumed to be around 250 mln EUA allowances calculated at €80), but note that at prices of €60 - this will already be around 330 mln EUAs, €50 - 400 mln EUA, €40 - 500 mln EUA, €30 - approx. 670 mln EUA.
• Inclusion of the maritime sector: more EUAs included in the 2024 cap than the sector's emissions which will be phased in, and compliance period will start in 2025.
• Record Investment Funds short positions.
• Likely sell-off by other market participants in EU ETS: closure of long positions by power generators contracting in the EUA market several years ahead (and this is done by opening counter-open short positions), potential sale of by industry to increase liquidity (due to the difficult financial situation and compliance period postponement).

TECHNICAL FACTORS (futures):

• In February, allowance prices fell to key support levels around €50-€52. Below this there are no major supports where the price can stop. The next one is only €20 lower - at €30-€32.
• On the monthly and weekly charts, there are no signals for a EUA's reversal of the current downtrend looking into: two moving averages (in both cases, the EUA prices are below their levels, but on the weekly chart, the prices are already "touching" the faster average), potential divergences on the RSI, and buy signals on MACD.

Figure 1: EUA futures prices on a monthly (left side) and weekly (right side) chart

• A completely different situation can be observed on the daily chart, where signals of a potential price recovery (or the beginning of a trend reversal) have just appeared: EUA's are above both averages and are close to the formation of the so-called golden cross, increasing divergence on the RSI and a buy signal on MACD, large upward demand candles, inverted head and shoulders pattern (H&S).
• The potential upside range of the allowance price resulting from the H&S pattern and the 50% Fibo retracement of the last downward impulse is the €65 level.

Figure 2: EUA futures on a daily chart with potential price range (€65 level)

Table 1. Summary of downward trend reversal signals on the EUA market on a daily, weekly and monthly chart basis

Scenario for March 2024 (bullish)

• Range of increases to €65 implied by technical analysis.
• Continuation of TTF gas price increases, strongly correlated with allowance prices.
• Short squeeze of hedge funds in the futures market.
• However, taking into account seasonality, in only three out of eleven cases between 2013 and 2023, March turned out to be a bullish month (-3.5% on average).