ICIS EU Carbon: EUAs trading at all-time highs – speculative buying acts as price driver

Sebastian Rilling


This analysis has originally been published in an extended version for ICIS EU carbon subscribers on 10 February 2021 at 12:35 CET.

EUA prices reached new all-time highs in the first days of February, and continued their bullish trend through 11 February, when carbon broke the €40/t level for the first time. In this update, we shed light on the drivers behind the price surge, and argue that fundamental drivers merely followed EUA prices, rather than dictating them.

Main points

  • EUAs on 3 February reached a new all-time high of €37.56 on ICE, following a 6.5% surge on 2 February
  • Later trading days saw sustained strength in EUA prices, leading to a break of the €40/t level on 11 February
  • In our view, last week’s price increases are not fundamentally driven, but based on speculative buying amid a Bloomberg article stating that several hedge funds see EUAs reaching as high as €100/t in 2021
  • The latest Commitment of Traders (CoT) report by trading platform ICE confirms this take, with particularly players in the Investment fund category increasing their net long positions significantly


Fundamentals do not support current bullishness

  • Fuel switching costs for the German front-month (39% efficiency coal, 50% gas) moved well into negative territory early last week, indicating that demand for EUAs could be limited due to less demand from coal fired power stations
  • Gas (Dutch TTF on ICE) prices, despite a short uptick on Tuesday on news about a colder March outlook, were down 4% on Wednesday
  • After bottoming out on Wednesday, Dutch TTF Mar-21 gas prices surged by 13% to €20.18/MWh through Monday amid a colder weather outlook
    • The prospect of increased gas demand due to high EUA prices and utilities switching from coal to gas could have contributed to the upswing
    • The high gas prices then started to act as support for EUA prices towards the end of last and early this week
  • Figure 1 shows the development of fuel prices and the EUA price since the beginning of the year
    • As the chart shows, the marked increase came amid stable gas and a slight increase in coal prices for the year+1 and +2 contracts
    • Only after the initial price spike from EUAs followed the gas price, while coal had slight losses
    • This confirms the theory that EUA prices preceded the fuels in the price surge, and especially gas later reacted to increased demand
  • On the policy side, the third political Trilogue on the EU Climate Law on 2 February did not bring about a convergence of positions, and therefore does not explain bullish pressure in the market
  • Low traded volumes for the TP3 Spot contract as well as the March’ 21 delivery further invalidate a theory of industrial buying ahead of the 2020 compliance deadline

Source: ICIS, ICE

Speculators again?

  • It would not be the first the time that a news outlet triggered a (short-lived) price spike
    • An article by the Financial Times on 23 August 2020 had caused a similar surge, with a price correction shortly after
  • In our view, the recent up-tick is mainly driven by three factors
    • The Bloomberg article from 2 February, which had market participants cover in case that price levels similar to the ones brought forward in the article were reached later this year, and stimulated buying by speculative players
    • Technical breaches, caused by the news-driven demand in a low supply environment
    • An auction clearing on 3 February at €38.00, well above the secondary market at the time (€1.50 premium), with extraordinarily high cover ratio (1.91) and extremely low number of successful bidders (5, compared to 15 and 19 on 1 and 2 February)
      • This could indicate that a few speculative market participants intended to drive prices with a high auction clearing, providing further buying signals to the secondary market

CoT report

  • The CoT report published by ICE on 10 February sheds light on the dynamics in the week between 29 January, the date of the last CoT report, and 5 February, which is the status of the report that was published now
    • Investment Funds increased their net long position by 14.8 Mt, mainly due to an increase in their long position (+15.7 Mt)
    • Investment Firms or Credit Institutions (i.e. banks and brokers) increased their net speculative positions by 3.7 Mt, while increasing long and decreasing short positions
    • Other Financial Institutions (pension funds, insurance, etc.) went against the trend and decreased their long and increased their short speculative positions, for a net decrease in the long position of 2.8 Mt
    • Commercial Undertakings had their positions virtually unchanged, increasing both long an short positions by 4.9 and 4.8 Mt, respectively
    • Compliance players let go of 4.9 Mt of hedging volume, while increasing their short position at the same time
      • In particular the speculative short position saw a marked increase here, surging by 12.8 Mt over the week between 29 January and 5 February, indicating that traders are not convinced that the recent uptrend can be sustained
      • The total net position of Compliance players decreased by some 18.8 Mt
    • In general, the picture appears to be that investment funds were seeking to drive prices by buying significant long positions, as figure 2 suggests
    • Gas prices for ’22 and ’23 then followed EUAs later in the week, lending support to EUAs

Source: ICIS, based on ICE data

Our take

  • The recent bullish ride raises the question if the trend can be sustained in the light of the surge being mostly driven by speculative buying.
    • On the one side, with no significant fundamental drivers justifying such rise, a market correction could have materialized by now
    • But on the other side, both investment funds and commercial undertakings have shown resilience in defending their positions and the EUA price has shown no intention of releasing the gains it has made so far
  • In the coming weeks, the sustainability of the EUA price trend is likely to depend on one key aspect, namely how successful are the investment funds in attracting new waves of market participants as they did in 2018?
    • If they are successful, a price rise continuation is definitely on the table.
    • But if the recent market noise fails to attract more players to pile into the current spec volumes, investment funds and other players could start trimming some risk off their respective 51.3m and 37.5m net long speculative volumes
  • Given the current political uncertainty around the implementation of the Green Deal package and the changes on the EU ETS, however, the market is currently facing and will continuously face increased volatility over the course of the year

Sebastian Rilling is Analyst – EU Power & Carbon Markets at ICIS. He can be reached at Sebastian.Rilling@icis.com
Florian Rothenberg is Analyst – EU Power & Carbon Markets at ICIS. He can be reached at florian.rothenberg@ icis.com

Our ICIS EU carbon customers have access to extensive modelling of different options and proposals. If you have not yet subscribed to our products, please get in contact with Justin Banrey (Justin.Banrey@icis.com) or Audrius Sveikys (Audrius.Sveikys@icis.com).


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