May saw a steady rally in EUA prices, with the Dec 20 contract climbing back near the levels it was at in March before the Great Covid Sell-Off. A number of traders suggested that compliance buyers had taken advantage of earlier lower prices to build length against future requirements (beyond 2020) but that with levels rather higher now, we might see slightly moderated demand for a period.
EUAs last month returned a positive performance, ending the month about 6% higher than the historical average. The rally from the two-month low of €18.35 transformed what was looking like an otherwise average month.
Prices advanced more than 9% during May, closing at €21.40. EUAs are currently around 10% below their level on March 5, a similar distance as Cal-21 API2 coal and Cal-21 German baseload power. Cal-21 TTF gas (-16%) and front-month Brent (-24%) are lagging.
There were a couple of records set this month: May saw the lowest average cover ratio for EUA auctions – 1.60. This average may have been influenced by the May 5 sale, which had a cover of 1.01, the lowest ratio for an individual auction on record. And the May 29 auction had the lowest number of successful bidders since the sale on November 1 2018.
In the secondary market, the only record of note was that the range of closing settlement prices in the last week of the month was the narrowest since the last week of December 2018.
The clean dark and clean spark spreads are still maintaining healthy social distancing all along the curve, though one should expect something to change over time. There is such a wide spread between the front-month and quarter spreads on one side and the calendar spread on the other, that this situation probably won’t continue past the fourth quarter.
And what lies in store for June? History shows that it’s a fairly flat month, with the average of all June indexes for the month’s price evolution showing a decline of less than 1%. That rather uninspiring statistic hides some significant moves, however: in 2016 the price fell 25% during the month, while in 2012 it rose 28%.
The EUA market will begin a long haul of daily auctions without a break until the end of August. Volume will also climb: there are 71m EUAs to be sold in June and 79m in July, compared with 54m in May and 67m in April, so the supply side may exert some pressure.
The demand picture remains fairly opaque due to the uncertainty around the end of lockdown across Europe. While industries may well be restarting, it's not clear how healthy their order books are and what capacity they'll be operating at.
The gas and power price evolution will probably be the most interesting element of the market going forward. As the charts below show, the curves for both cal-21 TTF gas and German baseload are in a contango that has grown steadily wider this year, while cal-21 API2 coal has maintained a fairly steady curve. It doesn't seem as though these trends continue for much longer without some reversion.
June is probably going to be a critical month in terms of the pandemic – there are a lot of consumer-oriented sectors that are reopening during the month, as governments try to give the impression that life is returning to normal. However, it's one thing to boost supply: the question is whether there the demand side has confidence.