• Alessandro Vitelli

Monthly review – April 2020

Here's my regular monthly romp through the charts and data for last month.


1. Prices had one of their better Aprils in historical terms, with the front-December price ending the month nearly 15% higher than where it began. Of course, the fact that March was truly awful (-25%) helped quite a lot...


2. On a YTD basis, 2020 is the third worst-performing year so far, with the price down by more than 22% so far. Only 2013 and 2016 saw a bigger percentage decline by the end of April.


3a. For the energy complex as a whole, crude takes first prize, and we can see how it's also impacted gas prices – given that we have known for many months how oversupplied the gas market is, I tend to think this year's decline is more about oil's weakness. Carbon corrected its slightly delayed nosedive, but as we move into May EUAs are looking weaker again.

3b. It's also worth looking at how energy performed since the Great Covid19 Sell-Off (GCSO) began on March 6. Year-ahead coal remains blissfully ignorant of the price drops elsewhere, which hasn't helped its competitive position, but Cal-21 gas is pretty resilient too. Most of the real action has taken place at the very front end of the curve. The globalCOAL weekly index has prompt DES ARA coal at $40/tonne rather than the ICE June contract at $41.85/tonne. Meanwhile the year-ahead contract is at $52.30.


4. A number of participants remarked in April that clean dark spreads were improving, and the data bears this out. However, clean spark spreads were also getting better, and the overall outcome was that gas maintained a steady advantage over coal both in the near- and long-term.


5. Open interest is shifting out of the Dec-20 contract and into the Dec-21 and even Dec-22 contract. It's not unusual for this to happen, but it's interesting to see when this started. Since the GCSO began in early March, Dec-20 OI has dropped by 2.2% while Dec-21 OI is up by nearly 48% and Dec-22 by 34%.


6. The pressure of selling at the front end of the curve widened time spreads sharply, to the point where the Dec20/21 now exceeds the comparable Y/Y+1 spreads in 2018 and 2019. The 2018 Y/Y+1 spread widened over the year because the value of the underlying was rocketing, while the 2019 Y/Y+1 reverted to the normal degradation over time. This year the spread has widened because the price has dropped at the front of the curve. Three different years, three different lessons.


7. EUA volume has been extremely high. We're on the verge of seeing 2 billion Dec 20 EUAs changing hands on Ice Futures for the year to date, the fastest this total has ever been reached. To put this into perspective, in 2010 the market traded a total of 2 billion EUAs over the entire calendar year.


8a. EUA correlations to the power complex looked to be shifting most recently, with carbon detaching from gas and beginning to move in concert with coal. However, if the EUA weakness of the last couple of days continues we might see this trend start to reverse again.

8b. And carbon's correlation to equities remains strong at the moment, and fundamentals seemed to be exerting next to no influence over EUAs in April.


9. The remaining CER curve has moved into backwardation as the spot market has built up a €0.09-0.10 premium over the Dec 20 contract. With time running out before UN offsets become ineligible in the EU ETS, buyers appear to be willing to pay more to take prompt delivery, though it's not immediately clear why.


10. What will May bring us? The month has typically been a mixed bag in terms of overall price direction, though the average price movement in previous years has been pretty positive.



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