Year in Review: Carbon credits, shale, and soybeans surprise

Looking back at 2018 from a perspective of finding and explaining the most dramatic or surprising commodity moves, we find several falling into those categories. A year that began with optimism driven by synchronised global growth ended instead with a synchronised sell-off. While the US trade war with China has created most of the headlines, some very important developments have been adding to the market’s unease. A 30-year bond market rally paused with the price of money rising in response to the US Federal Reserve’s continued efforts to normalise its interest rates. While the price of (dollar) money went up, the quantity began falling as central banks began moving towards quantitative tightening instead of easing.

Adding to this, we saw a challenge to demand and growth from the strong dollar. This development had an especially negative impact on those emerging market economies that are loaded up with dollar debt at a time of rising interest rates. 

ICE EUA Carbon Emission contract (+202%)

While Bitcoin faltered, another market stood ready to take over as the high-flyer of the year. The EU Carbon Emission contract jumped by more than 200% in response to last year’s change in European regulations governing the availability of allowances. The idea behind the so-called Market Stability Reserve 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 must buy twice the amount of allowances as plants burning natural gas.