Stronger gas propels EU carbon prices to near two-month highs

European carbon permits hit a near two-month high in the week ended Aug. 2, supported by stronger gas even though fundamentals remained largely bearish.

EUAs were trading at Eur70.56/mtCO2e ($77/mtCO2e) at 1417 GMT on Aug. 2, compared with a settlement price of Eur67.65/mtCO2e on July 26, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed EU Allowance contracts for December delivery at Eur71.22/mtCO2e ($76.87/mtCO2e) Aug. 1, up Eur3.57/mt, or 5%, compared with the last trading session in the prior week.

EUAs were on an upward trend this week, boosted by a rally in natural gas prices amid low liquidity during the summer holidays. A tightening European LNG market and heightened geopolitical tensions in the Middle East also supported the wider energy complex.

Gas correlation

Traders said that the support for EUAs from natural gas is likely to keep the price well above the key psychological support of Eur65/mtCO2e in the near term.

"I don't think it will go back to Eur65/mtCO2e anytime soon," said an EU-based carbon broker. "But if we do go back, I will go long again. And I know that many of my clients will do the same as well."

Platts assessed the benchmark Dutch TTF August-delivery gas contract at Eur36.86/MWh Aug. 1.

Commenting on the exit point, traders said that Eur75/mtCO2e could potentially be a preferable level to take profit.

"I will definitely start thinking about selling some of my positions at Eur75/mtCO2e," said a UK-based trader. "I don't expect a strong and persistent upward momentum."

Analysts with Commodity Insights said they expect the sentiment in August to move from bearish to neutral amid rising cooling demand and ahead of heating season.

"When renewables are unable to meet growing cooling demand, EUA prices are expected to remain around the Eur65-70/mtCO2e range but rise ahead of the heating season of 2024/2025," they said in a recent note.

However, some traders were concerned that liquidity in August due to summer holidays could be low, putting some pressure on EUA prices.

Auction supplies

Auction volumes in August are set to total 40.3 million mt of EUAs, a fall of 9% from July, but more than double the amount auctioned in August 2023.

Analysts at Commodity Insights expect prices to remain in the Eur65-70/mt range for the third quarter.

"This is because the structural demand for EUAs in the power and industry sectors is expected to remain stable," they said in a recent note.

"The buildout of solar capacity in Europe will continue to weigh on the call on thermal generation, particularly over the summer."

Meanwhile, auction volumes for the last four months of the year are expected to see a marginal rise but this includes no extra allowances from the REPowerEU deal.

Daily volumes for the common EU auction between September and December 2024 have been revised to 3.2874 million mt from 3.248 million mt.

This comes as the European Energy Exchange, which hosts the daily EU Allowances auction, also published the revised 2024 and 2025 auction schedules.

A total of 679,921,500 allowances will be auctioned in 2025, according to the auction calendar released by EEX.

Commenting on the EUA auction volumes, traders said the news wasn't deemed as a driver as it wasn't a big surprise to the market.

"I don't think it was a big surprise to the market, and I don't see it being in the driver's seat for now," said an EU-based carbon trader.

UKAs steady

UK carbon permits remained under pressure Aug. 2 even though prices briefly rebounded on the fourth session in the week.

UKAs were trading at GBP38.47/mtCO2e ($49.37/mtCO2e) at 1419 GMT Aug. 2, compared with GBP39.58/mtCO2e on July 26, ICE data showed.

Platts, part of Commodity Insights, assessed the UK Allowances nearest December at GBP40.14/mtCO2e.

Trading activity eased compared with the strong sell-off in the prior week. The average daily trading volume was lower than the previous week, down 18% from 1,952 futures contracts per day to 1,601.

"Looking ahead, we expect prices to decline marginally to the low-GBP40/mt range in July and August as profit-taking continues. Towards the end of the year, we expect prices to reach GBP49/mt," analysts at Commodity Insights said in a recent note.