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Insights & News / Markets

SparkChange Carbon Market Monthly Report (February 2024)

March 6, 2024

Philipp Ruf
Philipp Ruf

Data & Analytics

February Developments:

  • European carbon continued its weak start to the year, with the EUA price falling a further c13% for the month of February. The month’s closing price of EUR 56 was the lowest since July 2021, and the intra-month low of EUR 51.08 on the 23rd of February was the lowest price since May 2021.
  • The weakness in EUA prices was fairly consistent for the first three weeks of the month. Bearish sentiment persisted, with market focus dominated by continuing weak fundamentals - low emissions due to sluggish economic output, strong renewable power generation, mild weather conditions at the tail-end of winter.
  • In particular, the EUA price tracked gas prices lower, with Netherlands TTF Nat Gas recording a similar, c15%, decline for February. The reason for the lockstep performance of the two assets, is that whilst the bulk of European power generation will have already switched from coal-fired to gas-fired power generation where possible, incremental declines in the gas price can still incentivise the most efficient coal plants to be switched off in favour of even their least efficient gas counterparts.
  • We continue to keep a close eye on Investment Fund positioning, where we saw bets on the short side continue to increase. ICE’s CoT data showed absolute short positions grow 22% from the end of January to the last February release.

Outlook

  • Whilst the overall EUA price performance for February was disappointing, we have started to see signs of the market at least considering finding a bottom … In the final four trading days of February, the EUA price rallied c7% from the 23rd of February lows, triggered by forecasts of low wind generation across Northern Europe, that triggered a mini short squeeze. MTD in March, that short squeeze has continued, catalysed by LNG supply disruption out of the US, meaning that overall the EUA price has rallied some c15% from the lows.
  • At the same time, we note above that the absolute short positions held by Investment Funds have continued to grow, but the net short position in aggregate is no longer expanding. Investment Funds are also increasing conviction on the long side, meaning that the net short position has stabilised at the high level seen late last year. We see this increase in conviction on both sides of the bet as indicative of the fact that, whilst short-sellers are pushing for further downside on near-term bearish fundamentals, longer-term investors are starting to look through to the more bullish market dynamics that leave the EUA market looking extremely tight in 2026 – 2030.
  • ICE’s CoT data does not include physical holdings of EUAs, and on that front we have now seen a c80% increase in the number of units in issue in SparkChange CO2.

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