Market and product

EU carbon dioxide allowance prices could face a rangebound period over the summer, with rising volume from government auctions offsetting potential gains from strength in the underlying energy complex.

"The market is hovering around Eur6.00/mt and it seems to be quite comfortable remaining there at the moment," said Matteo Mazzoni, an analyst at Bologna-based independent energy research company Nomisma Energia.

"I do not think we are going to move much in the coming days. The market is indeed looking for a new direction," he said.

"The energy market has turned positive, and if natural gas and electricity keep rising this will lift carbon as well. I still see Eur7.00/mt as unreachable in the short-term, but we are getting there," Mazzoni said.

Strong gains seen on German year-ahead wholesale power prices in April and May and to above the Eur26.00/MWh mark in early June, provide a notionally supportive element for carbon prices.

However, power's gains in this period are partly linked to stronger underlying fuel costs, including coal and natural gas, meaning power generators' profit margins have not shown a healthy increase, suggesting little increase in demand for EU Allowances from utilities.

On the policy side, proposed post-2020 reforms put forward by the EU Parliament's EU Emissions Trading System rapporteur Ian Duncan on Tuesday had little impact on prices, with no new elements that would address the underlying surplus of allowances, barring a potential hike in EU ambition linked to a global stocktake in 2023 under the UN's Paris Agreement.

Traders said those elements were too far out to affect the market now, particularly given uncertainties in an EU legislative process still in its early stages.

A London-based carbon trader said Ian Duncan's report did not have much impact on prices. "The legislative cycle is in its infancy, and existing price drivers are, to my mind, far more relevant for price action into Q3."

With few bullish elements on the horizon, carbon prices could be set for a moribund summer, particularly given a near-term increase in primary supply.

The volume of EUAs entering the market from auctions is set to increase in June and July, following lower than normal supply in May, linked to several public holidays.

Total auction supply in May fell to 51.78 million mt from 69.08 million mt in April, according to data from auction hosts European Energy Exchange in Germany and the ICE Futures Europe exchange in London.

Last month saw public holidays on May 2, 5, 16, 26 and 30, which curtailed auction supply. In addition, a Polish auction set for May 25 was canceled due to low bids, with the volume of 3.526 million mt added to the next four Polish auctions on June 22, July 20, August 17 and September 14.

The auction volume is set to rebound to 73.38 million mt in June and 69.96 million mt in July, keeping the market well supplied, before falling to 33.67 million mt in August as governments scale back their carbon sales in the seasonal holiday period.