Carbon hitting the brakes after four-fold gain Carbon hitting the brakes after four-fold gain Carbon hitting the brakes after four-fold gain

Carbon hitting the brakes after four-fold gain

Ole Hansen

Head of Commodity Strategy

The EU Carbon Emission contract (EMISSIONSDEC18 and CFIZ8), which had become the 2019 version of Bitcoin, has slumped by 30% since Monday following a four-fold increase during the last year. The main reason behind the year-long rally was last year’s change in European regulations governing the availability of allowances. The idea behind the so-called Market Stability Reserve (MSR) mechanism for carbon allowances from 2019 was to drive up the price of carbon emissions and thereby force a move away from coal to cleaner fuels such as wind, solar, hydro, and not least gas. A power plant using coal has to buy twice the amount of allowances as plants burning natural gas. 

The unintended result has been a huge speculative wave of buying which helped drive the price higher until reaching €25/ton on Monday.  With speculative more than commercial traders driving the price higher, it did not take much of a change to remove at least some of the speculative froth. According to the Financial Times, the reason for the correction this week may have been triggered by comments from Poland’s energy minister calling for the EU to look at intervening in the market. Poland relies heavily on coal to power its utilities while a major consumer like Germany still produces close to 40% of its electricity from coal.

Consumers and utilities alike have all suffered the consequence of higher carbon emission prices. The cost of electricity in some areas have risen beyond the elevated levels seen last winter during the “Beast from the East” surge.

Looking ahead, the upside may find some resistance from the increased focus on political intervention and signs of improved supplies from gas, hydro, and wind power. From a trading perspective, some massive call option bets on the December contracts have also played its part in the recent price volatility. As the market goes up sellers of the options have to buy futures to hedge a rising delta while the opposite is the case in a falling market. When the volatility at the same time jumps from around 40% to above 60% it suddenly becomes very difficult to hold a position. 

The sell-off has paused today with the price bouncing after finding support at €17.70/t, the trendline from January.
Carbon (CFIZ8)
Source: Saxo Bank
The carbon correction has also brought some relief to the European power market. 
Carbon

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992