SG Commodities Review: Carbon

SG Commodities Review: Carbon

Paolo Coghe & Stephanie Aymes
2013.03.20

■ After the crucial success in the ENVI vote on February 19, the path to the formal approval process for backloading will continue and the Parliament and Council, along with the European Commission, will enter into ‘trialogue’ negotiations to arrive at a common text before the plenary vote scheduled for 15 April at the European Parliament.

■ A (positive) outcome of the plenary vote will give member states and the commission the green light to start the work on the second crucial element of the backloading plan: an amendment to the EU auctioning regulation, which sets out the details of backloading and provides for delaying sales of 900Mt of permits.

■ The positive outcome of the ENVI vote has failed to provide strong support to prices in the short term, but it has certainly kept the EU-ETS alive. Perhaps the failure to support prices is explained by a less convincing ENVI vote than the market expected (25 votes against backloading, 38 in favour). Whatever the reason, we believe that, as the political process continues to unfold, there will be plenty of other opportunities for EUA prices to move up … and down!

■ Furthermore, it is important to remember that on 14 November the EC released an additional set of documents outlining its options to address the oversupply via ‘structural’ measures. These are the much-needed, but hard-to-implement measures that aim to permanently eradicate the surplus. So, following several months punctuated by concern for the state of the emission markets, it is once again the regulatory front – rather than the economic one – that will continue to provide impetus to the EU-ETS.

■ Against this backdrop, we have examined recent price action in conjunction with a reading of volumes and open interest to determine if an ongoing trend is being fuelled by additional new buyers/sellers. We conclude that although EUA prices have shown the capability to strongly bounce back up of late, they are still in the process of confirming such progress, and face strong resistance in the region of 5.55/6.00 €/t. More buying strength would be needed to confirm a more prolonged recovery. Conversely, failure to re-integrate the former channel (which is what has occurred so far in March trading) would be seen as negative as it would attract fresh new sellers.

■ At this stage we leave our forecasts unchanged as we wait for the next round of legislative/regulatory action to take place over the next month or so.