EU Allowances auctioned by the EU on a spot delivery basis on the European Energy Exchange cleared at Eur8.70/mt ($10.67/mt) on Monday morning -- the highest European carbon auction price since February 28, 2012.
In the secondary market, EUA futures for December 2018 delivery pushed to a two-year intra-day high of Eur8.90/mt on Monday -- 10 euro cent short of a six-year high for the contract.
Carbon prices have powered higher from a low of around Eur4.40/mt in May 2017 -- a doubling of the price within eight months -- as traders began to take account of rules that will tighten supply after the current third trading phase ends in 2020.
In addition, the EU established a Market Stability Reserve that will remove 24% of the cumulative surplus of allowances every year starting January 2019.
With the MSR now less than 12 months away from becoming operational, carbon prices have begun to reflect a declining oversupply over the long term.
Several carbon market participants last week said short-term demand-side fundamentals do not support higher prices, with milder than normal weather across much of Europe keeping a lid on heating demand, and recent windy weather displacing thermal generation on the grid in major economies including the UK.
In addition, German year-ahead clean dark spreads have eased lower in January, reducing the incentive to sell power in the forward markets, which is normally accompanied by utilities hedging carbon in the futures market.
The rapid surge in carbon prices in January may now expose prices to a downward correction, with price direction determined as much by speculative activity as from underlying fundamentals in the electricity and generation fuels markets.
On the bearish side, up to 750 million mt of allowances are expected to be handed out freely by EU governments to the industrial sectors in February, and this could limit price upside in the short term.
Nevertheless, some analysts have recently upgraded carbon price forecasts on the forward curve as the MSR looms on the horizon, with some expecting prices to push higher into double euro digits this year, ahead of the reserve biting into auction supply in 2019.
"[We] expect the December 2018 contract to reach Eur10.00/mt by the end of the year," said an analyst at a Northern Europe-based power market analysis company. - Platts -