EU carbon allowances under the EU Emissions Trading System continued to climb Wednesday, hitting an intraday high of Eur14.10/mt in the morning session.
The market is seeing this step-by-step increase ahead of the release of verified annual CO2 data, which is likely to reveal higher emissions in Europe.
EU Allowance futures contracts for delivery in December 2018 on the ICE Futures Europe exchange, which closed at a new six-year high of Eur13.68/mt on Tuesday, erased early day gains to trade at Eur13.48/mt at 1300 GMT.
"It seems to be too strong this level of demand to be just caused by compliance buying," a market source said. "Unless the market was shorter than expected."
"I still think this trend cannot go this way much longer," he said. "A correction will come at some point."
The European Commission is expected to release on Tuesday partial installation-level CO2 emissions data across the EU ETS for calendar 2017, which is a major demand indicator for EUAs last year.
Many carbon analysts have predicted a slight rise of around 0.5% in 2017 emissions from power producers and factories under the ETS.
In addition, most EU member states have begun the process of annual free allocation of EUAs to their industrial sectors, which is supposed to be completed by the end of February each year.
The latest update by the European Commission on March 23 showed that a total of 631.14 million mt has been allocated out for 2018, making up 83% of the total eligible volume.
The process of free allocation can have a bearish impact on prices if industrial companies sell off surplus allowances into the market. However, this year may be different if industrials take a more cautious approach and decide to hold onto spare volumes in anticipation of tighter supply in future.
In the longer term, the market expects a tightened supply landscape after the EU rubber-stamped the Market Stability Reserve, which is set to absorb just over 40% of the auction volume in 2019 and in subsequent years, cutting into the oversupply that has kept prices in single digits since 2011.
In the European power markets, bullish carbon prices boosted the later-dated contracts again on Wednesday, with German and French baseload Calendar 2019 power prices higher at Eur36.35/MWh and Eur41.30/MWh, respectively. - Platts -