Is CO2 the new Game Stop?

In a week of dramatic price moves in the carbon market, some participants have questioned the reasons for the rise to fresh highs. Is it the role of new entrants, could EUAs be the new Game Stop? 

Listen to a discussion on the various factors at play in the ever volatile EU ETS and the outlook for prices for the weeks and months ahead. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel 

Guest: 

• Ingvild Sorhus, Senior Analyst, Refinitiv 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:30

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters, an informal setting. In today's pod, we again turn to fairly dramatic price movements in the European carbon markets. This week, prices have risen above 38 euros from around 32 at the start of the week. Madness, say some pointing to the role of speculators such as funds in driving prices up the wild west. Some traders have told us, or are maybe the high prices, a natural reflection of the eus ambitious climate targets. But what has driven prices to rise by more than 6% today in several sessions this week and close to 70% since November. I'm Richard Sverrisson and helping us to unravel the reasons behind the current bullishness in carbon is Ingvild Sørhus analyst at Refinitiv. A warm welcome to you ing Ingvild, and it's very good to have you back on the pod.

Ingvild Sorhus, Senior Analyst, Refinitiv: 1:25

Thank you, Richard. It's very good to be here.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:28

Just before we delve into the details of what's going on in the EU ETS how's life treating you in the, in these COVID times? Yeah,

Ingvild Sorhus, Senior Analyst, Refinitiv: 1:35

I guess fairly well based in Norway, I think we can't complain too much. Trying to get outta the city in the weekends and get some air and can really breathe in the weekends. Yeah, I think it's okay, miss my colleagues in real life. But, I guess that goes for all of us.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:51

Absolutely. I'm sure there's snow in the forest around Oslo, which must help as well.

Ingvild Sorhus, Senior Analyst, Refinitiv: 1:55

Yeah, I'm a winter person, so winter is fine with me.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:59

Excellent. But let's get down to what's happening in the market carb market. The last time we spoke, price around 28. Euros a ton. So they've risen quite dramatically since then. And especially this week or this year. So what are the main drivers at the moment?

Ingvild Sorhus, Senior Analyst, Refinitiv: 2:13

Yeah, good question. As you said last time I was here, we were below thirties and we saw a quite strong uptrend from November and throughout the year. Maybe I can touch upon that price increase slightly first, and then I'll jump over to what's happened this year. But first and foremost, in December, we had the conclusion that me member states supported at least 55% climate target for Europe. European Commission already put forward their proposal or what they recommended in September, but in December, member states, which kind of. Are really the ones that decide this eventually said that, okay, we have an agreement we can support at least 55% target. And then there were more kind of specifics for the carbon market that, for instance, the auction. Normally you have a supply coming to the market via daily. And then in half of December there are no auctions because of lower supply over the holidays, but they normally resume again. Then in, in beginning of January, but in November, we already knew that those were going to be delayed. The European commission said the 2021 auctions will start. Either in the end of January or beginning of February. So also knowing that we went into this normal supply break, but that the supply break was going to be quite much longer than previously, or in previous years, was another supportive factor for this uptrend, November and December. And then you had a cold beginning to December, and then you saw also big movements in the gas market and carbon has followed that quite. Quite closely as well, especially in the front month contract. And also going into this year was an, quite kind of a cold start to the year and we've seen carbon follow quite closely and movements in the energy complex. So it's been more at least in the beginning of the year, it's been more kind of carbon taking cues from the gas market rather than other energy. Commodities are taking cues from carbon. So that's really has been the start of the year. We have hit, we hit. Then all time high, new all time high, both in December and also in the beginning of January. And with prices going up above 35 euros. And then we saw a dip in prices when we saw Ning of the gas in the gas market. And then it also has been these auctions or that was telling you about that they re returned to the market on the 29th of. January. And of course also this psychological effect that auctions are returning to the market is also then sometimes or at least market participants are a bit on hold to see how these kind of fresh supply to the market is then soaked up. And then they return on kind of the two first auctions last Friday or 29th of of January. And then on Monday this week saw quite disappointing auction results declared considerably below the secondary market. And we saw prices reacting to both declaring price and also the interest in auctions. Of course, after this big increase in prices from November to December's. And also you saw weakening fundamentals might have made people building up some short positions. And then when on Tuesday we had this massive increase in prices, or it started on Tuesday, this massive increase in prices. It was once one, it was the bullish auction. So the auction results were quite optimistic and quite good. So you could see that sparked the upward move. Then also you had bullish news reports where hedge funds were betting on a hundred euro carbon price already this year. So I think the spark was maybe the auction result and then was just like amplified by bullish news reports on hedge funds saying that we might see a hundred euro carbon price already this year, which then probably some market participants then were caught on the wrong foot and had to cover their short positions. And that's continued on yesterday. It was this crazy moves. It wasn't any changes dramatic changes to the fundamentals. So it seems to be a bit. Speculative driven, at least the few last days. And of course when people are, when you have a short squeeze on top of that, just amplifying the bullish move.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:29

Yeah, I mean we, we are recording this on Thursday, and so you're referring to the moves on Wednesday and Tuesday specifically. But I think it's interesting when you mention the auctions because when. In December, the lack of auctions was cited as a bullish factor, and now the auctions themselves are a bullish factor. So it's quite an interesting change.

Ingvild Sorhus, Senior Analyst, Refinitiv: 6:47

Yeah, it is. We have different period in the carbon market where on some days the daily auction results will have a huge impact on the price movements. And then you have other days where the auction results don't have impact on big impact on carbon prices. But I think especially when you have this startup where startup of the auctions, where maybe the market is a bit uncertain of how will this auction now be soaked up? What is the interest, et cetera, is then bringing more direction to the market than in other periods. And also I was. Bit uncertainty also this year because on the 29th of January, you started with the first phase four auctions coming to the market. So the EETS is then trading in different phases. Phase three ended in 2020, and now you started this new trading phase now in 2021. Also when you change between two phases, it's like some specific things, for instance, that you can't use phase four allowances for your phase three compliance. So you have to do compliance for your emissions in now in, the reporting is in end of end of March, and you have to be in compliance in the end of April. But for instance, these EUAs that comes to the auctions now in 2021 cannot be used for your 2020 compliance obligations. So that's a, just a specific thing this year. So I guess also that was, okay, what is the interest for these allowance that. That are hitting the market, but cannot be used for compliance now in April.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:22

I think that's very interesting. And and I think, for those out there who, who don't have your knowledge and the expertise of the technicalities of the ETS what should they be looking for in the auctions? When are they significant and when are they not?

Ingvild Sorhus, Senior Analyst, Refinitiv: 8:35

Yeah, good question. It varies really day on day. So I can't really say this period of time. Auctions are significant and this period of time auctions are not significant.'cause suddenly they will only take cues from equity markets or someday they will take only directions from the gas market. So it's really tricky. They jumping a bit bit back and forward, but often we see it's at least giving some directional signal or intraday, not necessarily setting kind of the direction for the whole day, but that they give intraday directions declaring at 11 every day on now it's only EX with EU common options on Monday, Tuesday, and Thursday. And then you have the Polish auction on Wednesday. And the German auctions on Friday

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:21

and the Polish auction out Outturned very much higher than market expectations, which caused this big surge in prices, if that's right this week. Yeah. So Ingle I think you mentioned media reports of hedge funds who are these speculators and ha have they just entered the market or have they been a while and they've chosen a moment to become active?

Ingvild Sorhus, Senior Analyst, Refinitiv: 9:39

Yeah, good question. I think we've seen the entry of financials or kind of the non-compliance participants into the market and maybe already started and in 2018 when we had the tripling of the carbon price after being absent in the market for quite a lot of years, when. You didn't see much movements, you didn't see any volatility. So they've been in the market earlier and then I think 2018, that kind of, when you saw prices were tripling and to, to the outside world that were more of those entering the market. Of course, we're seeing quite a lot of vol volatility also in the market, especially then. Yeah, 20 19, 20 20, 20 19 was much linked, more to the fundamental picture than other markets. Maybe last year we saw maybe the opposite where. The fundamental picture became quite weak. You started off the year quite weak with mild winter and lot of renewables, but carbon held up quite impressively. And then you had a coronavirus hitting Europe and it was quite clear that the demand or the emissions in Europe was going to be significantly lower in 2020, but still it was only dipping down to 15 euros, and then it was climbing up to together with equities, which kind of also make maybe an indication there where maybe not that much demand from compliance buyers, but an a different group of investors in the market. And I think also that it's, I think the enabler of why we see prices are being at the level they are now is of course climate ambition with the green deal of Europe and now renewed confidence in the US after you've seen substantial emission reductions and both kind of in 2019 linked to this fuel switching taking place which reduced emissions. So I think kind of investors are seeing this as a market that. It's going to be tighter year for year, and with the rise ambition as well, that's going to have to deliver on those climate ambitions, which then makes. Then perhaps kind of carbon and attractive assets for investors or fi financial investors.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:44

Absolutely. Ing I think we've seen also in the news recently, in the few days of about, a set of investors at Reddit, aggressively positioning themselves against the hedge funds. Have you seen any of that activity in carbon?

Ingvild Sorhus, Senior Analyst, Refinitiv: 11:55

I can't say that we've seen that directly, but of course that was brought up. We've seen kind of discussions popping up after now the prices moved quite. Substantially, like 16% over two days or something. Then of course, people were pulling up kind of the GameStop is carbon carbon market in the ua, the new GameStop. So of course, but I think also it's fair to say that it's I think there are a lot of hedge funds that also are taking long, long position betting on a higher carbon. Yeah,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:23

I think you'd be far too simplistic to say it's the, it's a similar position, but it's an interesting time. When you're seeing so much activity in other related markets. You mentioned gas, but of course you know what's happening in equity markets and in silver and GameStop. But what's gonna happen in the coming weeks and months? What are your expectations for the first quarter? As we go into, at the end of the first quarter we'll see the verified emission data coming up et cetera. But what do you expect in the coming weeks? Probably it's safe to say it's gonna be volatile ahead. Time ahead.

Ingvild Sorhus, Senior Analyst, Refinitiv: 12:50

Yeah. I think we can say definitely that it's going to be volatile. We could see some profit taking after the sharp price, but it's, kind of yesterday's price mo, or sorry, Wednesday price movement brought carbon price up to this bullish trend channel that carbon price have been following since beginning of November. So in that sense, I think it's fair to say that the bullish trend is back and supporting that prices could go higher. I think there are. A couple of things that are supportive. You mentioned the verified emissions and this specific rule as I mentioned, that you can't use phase four allowances for phase three co compliance and running up to the verified emissions. I think that will be supportive. I think also focus on the policy framework. You now know the overall target of 55% or at least 55% target. The European Commission will put forward a proposal in September, how kind of the framework for EUTS or their proposal on how the framework should look like to meet this new. New target. And I think, earlier this week you had the environment committee in the parliament talking about carbon border adjustment mechanism. Saying that they would rather see this carbon border tax or carbon border fee for import to Europe, creating this more levelized playing field for industrials that minimize the the risk of carbon leakage. And then you can remove also the free allocation, or the aim should be to reduce the free allocation to industry. So I think there will be a lot of these kind of discussions that will take place running up to the proposal in summer and also after the summer. So I think these might be supporting and also going to for the industry specific, it's normally they will receive their free allocation starting to hand be handed out in end of February. But this year. That won't happen until maybe Q end of Q2. So for industrial players as well they maybe not know completely the number of free allocation they will get, and they know also that it will be tighter going into phase four with, one is the uncertainty of how much they will get now with a with the framework that is up and running now. That might also be changed when you revise the whole legislation, making them all at least unwilling to sell and maybe also putting up different hedging strategies than we have previously seen from the industry players. So I think there are less people that are willing to sell, but probably increasing a number of participants are willing to buy and go into this, enter this market.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:20

You forecast prices for this year to average 33 euros. Have you revised this at all? I know you, you mentioned talk of a hundred Euros and I've seen figures of 65 and some other numbers out there. But have you revised your outlook at all?

Ingvild Sorhus, Senior Analyst, Refinitiv: 15:33

No, we haven't. I think it's one spike of up to new heights of 38, we expect it to be quite volatile markets, but of course. If this establish itself at New Heights now, then of course we need to look into to see if we will revise our price price forecast. But we're trying to stay a bit cool and see really 'cause that's the yearly average's, not necessarily what we see in February, beginning of February.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:01

Absolutely. It's a time for Cool Heads sing will for sure. But you mentioned the targets being discussed now at the EU level. We published a story on Montel News this week saying that a possible delay in the debate around the targets for 2030, the 55 or 60 with the council and some of the meps not in agreement here. It's, would this, would a delay, would that impact prices at all? The delay in the discussions?

Ingvild Sorhus, Senior Analyst, Refinitiv: 16:24

That's on the climate law that they're discussing now with the climate neutrality target of 2050. And of course they want to also pinpoint the 2030 target. And as you say, the parliament, they voted in favor of a 60% target. While member states are supportive of a, at least 55% target, we in Refinitiv and my team, we think it will be. Really the member states that are setting this 55, it will be the member states that will have the final word in the final target. So we think that will be at least 55 in the end. So in that sense. We don't necessarily see even though the discussions between member states and the parliament is dragging on, it seems like the rest of the process is following the timeframe as it's set up.'Cause it's such a large package that will come out in September. One thing is the what's happening to the UTS, but it's all whole other legislation also that needs to come out. To support a more ambitious target. For instance, renewable targets, energy efficiency targets, what happening in with the non-traded sectors. So it's all these kind of policy documents that needs to be revised in order to support a more ambitious target. And of course time matters because policy making, making process is taking quite a lot of time. You would in the end like to implement the new policy as well, and then you have to start kicking off that quite soon. So we don't necessarily see, but of course there are a lot of policy risk coupled to the specifics around how the EU Ts. Eventually will look like. Just remembering how difficult it was to agree on how the framework should look like after when you had the phase four review. That kicked off already in 2015 and with an agreement in 2018. So of course it will take time before we have all the details, but we don't necessarily see the climate law, like the discussions on the trial law being. Delayed that, that will delay the whole process.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:24

And of course, this is all exacerbated by the by the COVID-19 pandemic, which also, could potentially slow things down a bit. But just a final question for you ing, since we last spoke, the UK has said, it will establish its own. EU ETS or UK ETS. Sorry. ET not EU one. Obviously not. That's the last thing it wants. When do you expect this to be up and running? And in the meantime, will UK operators have to hedge themselves in the EU ETS?

Ingvild Sorhus, Senior Analyst, Refinitiv: 18:48

Good question. I don't think we are necessarily we don't have any expectations of when it will, when the details will come, but of course they will come eventually making an. Again, a hard time for compliance operators to the then UK ETS. It's been quite a lot of years with big uncertainties for those compliance players that have been. Then as subject to the UTS first and now will be subject to the UK ETS, I think it's a interesting question if they will hedge against ua. Probably some. I think we had report from a utility this week saying that they would not hedge EUAs going forward. So it's it's probably a mixed strategy because you really don't know what the price of A UKA will be in the end.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:35

And of course the EUAs are quite expensive at the moment. Thank you very much for joining the Montel weekly podcast this week. It's a, it is a fascinating overview at a very dramatic time in the market, and I'm sure there'll be more occasions like this when we can come and and discuss with you about what's happening in the market. So thanks once again for joining us this week. So listeners, you can now follow the podcast on our own Twitter account. Aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montenews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.