EU carbon near five-month lows but market poised for rebound, say traders

Carbon prices under the EU Emissions Trading System slid close to five-months lows in the week to Oct. 27, weighed down muted demand driven by lower power generation and weak macroeconomic fundamentals.

But several traders and analysts said they expect prices to recover in November as seasonal demand likely kicks in, aided by a fall in auction supplies.

European allowances for December were in a downward trend this week, trading at Eur79.49/mtCO2e ($84.75/mtCO2e) as of 0800 GMT on Oct. 27, down from a settle of Eur80.94/mtCO2e on Oct. 20, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur79.57/mtCO2e on Oct. 26, the lowest since June 2.

The market has been gripped by bearish fundamentals and weak technical signals all month despite an increase in European gas and power prices aided by geopolitical risks.

Almost all industry estimates expect a sharp fall in EU emissions in 2023, assisted by resurgent solar and wind generation along with fragile power demand.

But with auction volumes poised to fall sharply in November compared with previous months, the tide could turn, albeit gradually.

"Looking ahead, there is a bullish anticipation that EUA prices will increase on the back of supply restrictions and increased heat demand as we approach the winter months," S&P Global analysts said in a recent note. "We expect prices to hover around the high €80/mtC02e and low €90/mtC02e mark."

Geopolitics at play

A Brussels-based trader expressed a similar sentiment, adding that the ongoing tensions in the Middle East could spark a rally.

"An escalation of the conflict between Israel and Gaza might act as a catalyst counterbalancing this bearish dynamic by potentially disrupting additional upcoming regional supplies of gas to the EU," he said. "The ramifications of such events on the clean spark spread and correspondingly on the carbon market could rapidly result in a sudden upside momentum for the EUAS, which could in return rapidly be accentuated by the materialization of an eventual short squeeze for hedge funds having to cover their short positions."

Short-term fundamentals appear soft, but the specter of supply disruption looms large in European gas and power markets.

European natural gas spot prices were also ending this week marginally bearish amid stable supply and mild weather

Platts assessed the day-ahead contract of the influential Dutch TTF at Eur48.205/MWh in its Market on Close assessment process Oct. 26, gaining only 3 euro cents/MWh on the day.

S&P Global analysts expect prices to average Eur86.4/mtCO2e and Eur90.30/mtCO2e in November and December, respectively.

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