EU carbon prices sink further tracking weaker gas

European carbon allowances fell steadily in the week ending Feb. 21 amid a wider bearish energy complex. The drop was driven by a mixture of fundamentals, geopolitics and speculator readjustments.

"We are seeing this downward trend because of the sentiment related to Russia-Ukraine, but also because funds are increasing short positions," a Europe-based carbon analyst told Platts, part of S&P Global Commodity Insights. "UK Allowances, EU Allowances are plummeting a bit after Putin-Trump [potential] peace talks."

EU Allowances were trading at Eur73.95/mtCO2e ($77.40/mtCO2e) at 1513 GMT Feb. 21, down around 6% since the previous week. Platts assessed the EUA nearest December 2025 contract at Eur72.58/mtCO2e, the lowest since Jan. 8.

"While expectations of warmer and more blustery weather set a more bearish market view on carbon prices, further downside pressure has been introduced by reports of possible adjustments to the EU gas storage regulation toward a more flexible target," analysts at Commodity Insights said in a recent note.

News surrounding ongoing negotiations between the US and Russia on the Ukraine conflict have been fueling a bearish gas complex, with the Dutch TTF natural gas front-month contract settling 6% lower on the week Feb. 20, according to Intercontinental Exchange data.

"The bounce to Eur80/mt was speculation driven, the mild weather means fundamentals are bearish (as well as a perceived lower risk if the Ukraine war ends), so at some point, they dominate the technicals," a UK carbon broker said.

Net length

Meanwhile, investment funds have increased their gross short positions, resulting in a 3% reduction in net length. This marks the first time investors have trimmed positions in eight weeks.

A Commitment of Traders report showed that as of Feb. 14, investors increased gross shorts 7% from 43 million to 46 million, sending a bearish market signal.

This resulted in net long positions decreasing to 59 million EUAs, down from 61 million EUAs the week before.

A Europe-based trader agreed that the drop in prices was largely driven by ongoing talks between Russia and the US, with funds also acting as a price driver.

"I don't think it was justified ... this long position from hedge funds," the second trader said.

Market participants signaled Eur70/mtCO2e as the current support level, adding that they don't think prices will drop below this point.

UKAs dip

UK carbon values also dropped sharply amid selloff activity and bearish fundamentals for the UK energy complex, with warmer but windier weather expected.

"I think it is just a long overdue [adjustment] to the price rally, this [UK-EU ETS] linking argument wasn't really based on substance," a UK-based carbon broker said. "It is only so long that speculators can keep prices elevated if the policy and fundamentals don't back up."

UK Allowances were trading at GBP40.95/mtCO2e ($51.74/mtCO2e) at 1517 GMT Feb. 21, down around 12% since the previous week. Platts assessed UKAs for December delivery at GBP39.84/mtCO2e Feb. 21.

Prices for UKAs have been rallying in recent weeks following news of a potential linkage of the UK and EU carbon pricing systems after a meeting between UK Prime Minister Keir Starmer and his European counterparts.

However, market participants have warned that linkage would take time should it happen, and no officials have made further statements on the topic since.

"I can't see it happening for some time -- some analysts say 2030 at the earliest," the broker added.