Analys

The value of an EUA spot contract is at least EUR 80/ton

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2 år sedan

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23 januari, 2024

A fight between short-term C-t-G differentials at EUR 40-60/ton and longer term values of EUR 100/ton already in 2026. The value of an EUA today is thus at least EUR 80/ton.

Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

Low emissions, falling nat gas and C-t-G differentials and EUA prices falling along with that is all the range in current market dynamics. But it won’t last as the MSR will quickly remove surpluses and the steep decline in supply of EUAs from 2026 onward will quickly drive the EUA price back up and above C-t-G differentials. The EUA price will then stop relating to power market dynamics as C-t-G switching is maxed out.

The EUA market is currently driven by front-end and front-year Coal-to-Gas dynamics and differentials with the EUA price in the balance between the two. At the very front-end (1-2-3 mths) the C-t-G differentials implies an EUA price close to EUR 40/ton while the front-year 2025 has a C-t-G differential of a little over EUR 60/ton. Thus the front-year is probably a better and stronger guide right now.

But C-t-G differentials holds wide ranges of values and are very sensitive to changes in coal and nat gas prices. So the simple rule of trading approach is probably: ”Sell EUAs if the nat gas price falls”.

The total capacity to switch between coal and gas and thus flex the total amount of emissions is quite limited with a capacity of maybe only 100 mt reduction potential. Thus as the number of allowances declines in the coming years the C-t-G differentials will stop to matter as the switch will max out. Implied by modeling (Blbrg) and also by market pricing of calendar 2026 and 2027 this looks set to happen over the coming 2-3 years. The consequence will be EUA prices which will be above C-t-G differential values and disjoint from power market dynamics.

The EU ETS market probably experienced an emission reduction shock in 2023 where total German emissions are estimated to have fallen by 73 mt YoY to 2023 or some 10%. If we assume that this also is true for the whole EU ETS sector and run Bloomberg’s Carbon Price Model we see that the consequence of this emission reduction shock is washed out by 2026 with the EUA price then back at EUR 100/ton and above. The reason for this is probably due to the Market Stability Reserve dynamics which quickly removes any surplus EUAs in the market and brings the TNAC quickly down below the 833 mt upper trigger level again.

The model runs tells us that no matter what happens to gas prices and EUA prices and emissions in 2023/24, it will all wash out withing three years with the EUA price back at EUR 100/ton in 2026. If we assume a cost of carry of 7% it implies that the value of an EUA today is minimum EUR 80/ton due to bankability (buy today and hold to 2026 and then sell).

The sell-off in natural gas prices has been the guiding light for the sell-off in EUAs. Accelerated decline in natural gas prices seems to be the guiding light for the EUA price. The decline in the front-year TTF nat gas price accelerated from late October 2023 and continues to trade lower and lower. The front-year 2025 yesterday closed at EUR 32/MWh (-1.1% on the day) while the year 2027 traded down 0.9% to EUR 27.1/MWh. In comparison the average nominal TTF nat gas price from 2010 to 2019 was EUR 20/MWh while the inflation adjusted price was EUR 26/MWh. The 2027 TTF nat gas contract is thus now trading very close to the historical inflation adjusted average.

The falling nat gas price is in part a fundamental driver and in part an associated driver for the EUA price. The fundamental dynamics of the EU ETS market are highly complex because there are so many different participants with different strategies and abatement cost curves. As such it is hard to base trading of EUAs on a complex fundamental bottom up model. The more robust and simple thinking which we think traders may follow is: ”Natural gas is a low CO2 emitting fossil fuel. If the price of nat gas falls then it gets cheaper to switch to a lower emitting fossil fuel. I.e. it gets cheaper to be semi-green.” The trading rule then becomes: ”Sell EUAs if the price of nat gas falls”. With little further in-depth analysis. It’s an associated trading strategy and we think this strategy has been hard at work sine October/November 2023.

The front-year TTF nat gas contract versus the front-month EUA price since Jan 2023. Accelerated selling from Oct/Nov last year.

The good old Coal-to-Gas abatement dynamics is the cornerstone to ”sell EUAs if gas prices fall”. Almost half of emissions in the EU ETS system stems from the power sector running on a mix of coal, gas and other non-emitting sources of power. There is an assumed flex between coal and gas power production and this flex is driven by relative prices in coal, gas and CO2. So if the nat gas price falls, the power sector will burn more gas because it is cheaper, emit less CO2 so the EUA price falls.

If the EU ETS market is massively oversupplied as it was from 2008 to 2019 it hands no constraints at all on the emitters. The result is no dynamical price interaction between the EUA price and Coal-to-Gas differentials. But if the EU ETS market is nicely balanced then C-t-G dynamics kicks in and the EUA price will start to trade on the balance ”Coal+CO2 = Nat gas + CO2” where nat gas of course has a much lower carbon emitting intensity.

But there is not one switching balance as there are many coal and gas plants with different efficiencies. If we choose three different sets of coal and nat gas power plant efficiency combinations and graph them back in time with focus on front-end power market dynamics we typically get the following.

Coal-to-Gas switching price bands given by front-end power market dynamics are basically saying: ”What should the CO2 price have been for coal and nat gas power plants to be equally competitive.” Here compared with the actual front-month EUA price.

The same graph but starting in 2023. These implied Coal-to-Gas switching bands are highly sensitive to changes in coal and nat gas prices. This probably makes them partially difficult to trade on on a daily basis. Thus trading strategies typically end up with a simpler rule: ”Sell EUAs if the nat gas price falls”.

Annons

But the possible combination of efficiencies between coal and nat gas is much wider. Coal power plant efficiencies in Europe are assumed to have a range of 35% to 46% while nat gas power plants have an assumed range of 49% to 58%. The following graph has made all the combinatoric crosses in 1% incremental steps. All for the same given set of coal and gas price which here was chosen as the front-year ARA coal price of USD 94/ton versus the front-year (2025) nat gas price of EUR 31.5/MWh. Then all these outcomes are sorted from low to high.

What this distribution shows is that if the ”fair” EUA price stemming from C-t-G differentials can be very wide depending on how loose or tight the EUA market is. If it is quite loose, but just tight enough for C-t-G differentials to matter then the fair EUA price for this given set of coal and gas prices could be as low as EUR 30/ton. Conversely, if the EUA market is so tight that C-t-G differentials are on the verge to not matter any more, then the fair price could be as high as EUR 100/ton.

But the average of all these cross-combinations is EUR 59.1/ton which is quite close to where the front-year EUA is trading today.

Distribution of front-year implied EUA prices given by C-t-G differentials based on front-year coal and nat gas prices

In the following graph we have done the same cross-calculations but for calendar 2027. What we see here is that the current EUA Dec-2027 is trading far up in the distribution of switches to the level where switching is maxed out completely to the point where C-t-G differentials do not matter any more

Distribution of calendar 2027 implied EUA prices given by C-t-G differentials based on Y2027 coal and nat gas prices and compared to the current Dec-27 EUA price. It may be random, but interpretation here is that by 2027, the power market dynamics will start to matter little for the EUA price as the capacity to switch to nat gas has maxed out completely.

This is also visible when we calculate the cost of coal+CO2 and gas+CO2 for the nearest three years to 2027 and compare them to German power prices for these years. What we see is that coal power plants are completely price out of the stack and are no longer competitive. Unless of course they are located in a place where they cannot be out-competed by nat gas power plants due to grid restrictions. The result is high, local power prices instead.

The market price of German power for 2025/26/27 versus the cost of production by coal and gas with CO2 market prices included.

Sharp reduction in emissions due to the energy crisis has a maximum three year impact before the EUA price is back to EUR 100/ton. Early in January it was reported by Agora Energiewende and then further by Blbrg that German emissions dropped YoY by 73 mt to 70-year low in 2023. That is roughly a 10% YoY reduction in emissions. But it is for the whole economy and not just for the part of German emissions which are compliant under the EU ETS. Further it was stated that only 15% of the 73 mt YoY reduction was of permanent nature while 85% was deemed temporary. I.e. they will kick back over time.

We have used Blbrgs Carbon Price Model to run different scenarios with emission reduction shocks. We have assumed that what happened with emissions in Germany in 2023 is representative for the whole EU ETS to a lesser and larger degree. The model is of course a simplified, stylistic representation of the world so result must be treated with caution.

In the first set of scenarios we assume that the market ”only has 1-year forward vision” and then knows nothing about the future tightening. I.e. it is consistently front-end or front-year spot market balance and dynamics which dictates the prices. What these runs indicates is that the whole emission reduction shock from the recent energy crisis will by wiped away by 2026 with EUA prices then again trading back at EUR 100/ton. One likely reason for this is the MSR dynamic which quickly removes surplus EUAs from the market and brings TNAC (Total Number of Allowances in Circulation) back below the upper trigger level of 833 mt.

Since EUAs are bankable anyone can borrow money today and buy an EUA and carry it on an account for three years for three years to 2026 when the price will be back to EUR 100/b. Depending on what cost of carry you assume the implied value of an EUA today is thus at least EUR 80/ton.

The following model runs have only one year forward vision and as such cannot ”see” future coming tightness. As such the EUA price can crash for a single year as it is constantly the front-end fundamentals which dictates the price dynamics rather than longer-term fundamentals.

Scenarios on Blbrgs Carbon Price Model assuming emission reduction shock in 2023. All price paths are back to EUR 100/ton by 2026. This implies a value of an EUA spot today of at least EUR 80/ton

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Market Still Betting on Timely Resolution, But Each Day Raises Shortage Risk

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Down on Friday. Up on Monday. The Brent June crude oil contract traded down 5.1% last week to a close of $90.38/b. It reached a high of $103.87/b last Monday and a low of $86.09/b on Friday as Iran announced that the Strait of Hormuz was fully open for transit. That quickly changed over the weekend as the US upheld its blockade of Iranian oil exports while Iran naturally responded by closing the SoH again. The US blew a hole in the engine room of the Iranian ship TOUSKA and took custody of the ship on Sunday. Brent crude is up 5.6% this morning to $95.4/b.

Bjarne Schieldrop, Chief analyst commodities, SEB

The cease-fire is expiring tomorrow. The US has said it will send a delegation for a second round of negotiations in Islamabad in Pakistan. But Iran has for now rejected a second round of talks as it views US demands as unrealistic and excessive while the US is also blocking the Strait of Hormuz.

While Brent is up 5% this morning, the financial market is still very optimistic that progress will be made. That talks will continue and that the SoH will fully open by the start of May which is consistent with a rest-of-year average Brent crude oil price of around $90/b with the market now trading that balance at around $88/b.

Financial optimism vs. physical deterioration. We have a divergence where the financial market is trading negotiations, improvements and resolution while at the same time the physical market is deteriorating day by day. Physical oil flows remain constrained by disrupted flows, longer voyage times and elevated freight and insurance costs.

Financial markets are betting that a US/Iranian resolution will save us in time from violent shortages down the road. But every day that the SoH remains closed is bringing us closer to a potentially very painful point of shortages and much higher prices.

The US blockade is also a weapon of leverage against its European and Asian allies. When Iran closed the SoH it held the world economy as a hostage against the US. The US blockade of the SoH is of course blocking Iranian oil exports. But it is also an action of disruption directed towards Europe and Asia. The US has called for the rest of the world to engaged in the war with Iran: ”If you want oil from the Persian Gulf, then go and get it”. A risk is that the US plays brinkmanship with the global oil market directed towards its European and Asian allies and maybe even towards China to force them to engage and take part. Maybe unthinkable. But unthinkable has become the norm with Trump in the White House.

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TACO (or Whatever It Was) Sends Oil Lower — Iran Keeps Choking Hormuz

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24 mars, 2026

Redaktionen

Wild moves yesterday. Brent crude traded to a high of $114.43/b and a low of $96.0/b and closed at $99.94/b yesterday.

US – Iran negotiations ongoing or not? What a day. Donald Trump announced that good talks were ongoing between Iran and the US and that the 48 hour deadline before bombing Iranian power plants and energy infrastructure was postponed by five days subject to success of ongoing meetings. Iranian media meanwhile stated that no meetings were ongoing at all.

Today we are scratching our heads trying to figure out what yesterday was all about.

Friends and family playing the market? Was it just Trump and his friends and family who were playing with oil and equity markets with $580m and $1.46bn in bets being placed by someone in oil and equity markets just 15 minutes before Trump’s announcement?

Was Trump pulling a TACO as he reached his political and economic pain point: Brent at $112/b, US Gas at $4/gal, SPX below 200dma and US 10yr above 4.4%?

Different Iranian factions with Trump talking with one of them? Are there real negotiations going on but with the US talking to one faction in Iran while another, the hardliners, are not involved and are denying any such negotiations going on?

Extending the ultimatum to attack and invade Kharg island next weekend? Or, is the five day delay of the deadline a tactical decision to allow US amphibious assault ships and marines to arrive in the Gulf in the upcoming weekend while US and Israeli continues to degrade Iranian military targets till then. And then next weekend a move by the US/Israel to attack and conquer for example the Kharg island?

We do not really know which it is or maybe a combination of these.

We did get some kind of TACO ydy. But markets have been waiting for some kind of TACO to happen and yesterday we got some kind of TACO. And Brent crude is now trading at $101.5/b as a result rather than at $112-114/b as it did no the high yesterday.

But what really matters in our view is the political situation on the ground in Iran. Will hardliners continue to hold power or will a more pragmatic faction gain power?

If the hardliners remain in power then oil pain should extend all the way to US midterm elections. The hardliners were apparently still in charge as of last week. Iran immediately retaliated and damaged LNG infrastructure in Qatar after Israel hit Iranian South Pars. The SoH was still closed and all messages coming out of Iran indicated defiance. Hardliners continues in power has a huge consequence for oil prices going forward. The regime has played its ’oil-weapon’ (closing or chocking the Strait of Hormuz). It is using it to achieve political goals. Deterrence: it needs to be so politically and economically expensive to attack Iran that it won’t happen again in the future. Or at least that the US/Israel thinks 10-times over before they attack again. The highest Brent crude oil closing price since the start of the war is $112.19/b last Friday. In comparison the 20-year inflation adjusted Brent price is $103/b. So Brent crude last Friday at $112.19/b isn’t a shockingly high price. And it is still far below the nominal high of $148/b from 2008 which is $220/b if inflation adjusted. So once in a lifetime Iran activates its most powerful weapon. The oil weapon. It needs to show the power of this weapon and it needs to reap political gains. Getting Brent to $112/b and intraday high of $119.5/b (9 March) isn’t a display of the power of that weapon. And it is not a deterrence against future attacks.

So if the hardliners remain in power in Iran, then the SoH will likely remain chocked all the way to US midterm elections and Brent crude will at a minimum go above the historical nominal high of $148/b from 2008.

Thus the outlook for the oil price for the rest of the year doesn’t depend all that much of whether Trump pulls a TACO or not. Stops bombing or not. It depends more on who is in charge in Iran. If it is the hardliners, then deterrence against future attacks via chocking of the SoH and high oil prices is the likely line of action. It is impacting the world but the Iranian ’oil-weapon’ is directed towards the US president and the the US midterm elections.

If a pragmatic faction gets to power in Iran, then a very prosperous future is possible. However, if power is shifting towards a more pragmatic faction in Iran then a completely different direction could evolve. Such a faction could possibly be open for cooperation with the US and the GCC and possibly put its issues versus Israel aside. Then the prosperity we have seen evolving in Dubai could be a possible future also for Iran.

Annons

So far it looks like the hardliners are fully in charge. As far as we can see, the hardliners are still fully in control in Iran. That points towards continued chocking of the SoH and oil prices ticking higher as global inventories (the oil market buffers) are drawn lower. And not just for a few more weeks, but possibly all the way to the US midterm elections.

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Analys

Oil stress is rising as the supply chains and buffers are drained

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1 månad sedan

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17 mars, 2026

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A brief sigh of relief yesterday as oil infra at Kharg wasn’t damaged. But higher today. Brent crude dabbled around a bit yesterday in relief that oil infrastructure at Iran’s Kharg island wasn’t damaged. It traded briefly below the 100-line and in a range of $99.54 – 106.5/b. Its close was near the low at $100.21/b.

No easy victorious way out for Trump. So no end in sight yet. Brent is up 3.2% today to $103.4/b with no signs that the war will end anytime soon. Trump has no easy way to declare victory and mission accomplished as long as Iran is in full control of the Strait of Hormuz while also holding some 440 kg of uranium enriched to 60% and not far from weapons grade at 90%. As long as these two factors are unresolved it is difficult for Trump to pull out of the Middle East. Naturally he gets increasingly frustrated over the situation as the oil price and US retail gas prices keeps ticking higher while the US is tied into the mess in the Middle East. Trying to drag NATO members into his mess but not much luck there.

When commodity prices spike they spike 2x, 3x, 4x or 5x. Supply and demand for commodities are notoriously inflexible. When either of them shifts sharply, the the price can easily go to zero (April 2022) or multiply 2x, 3x, or even 5x of normal. Examples in case cobalt in 2025 where Kongo restricted supply and the price doubled. Global LNG in 2022 where the price went 5x normal for the full year average. Demand for tungsten in ammunition is up strongly along with full war in the middle east. And its price? Up 537%.

Why hasn’t the Brent crude oil price gone 2x, 3x, 4x or 5x versus its normal of $68/b given close to full stop in the flow of oil of the Strait of Hormuz? We are after all talking about close to 20% of global supply being disrupted. The reason is the buffers. It is fairly easy to store oil. Commercial operators only hold stocks for logistical variations. It is a lot of oil in commercial stocks, but that is predominantly because the whole oil system is so huge. In addition we have Strategic Petroleum Reserves (SPRs) of close to 2500 mb of crude and 1000 mb of oil products. The IEA last week decided to release 400 mb from global SPR. Equal to 20 days of full closure of the Strait of Hormuz. Thus oil in commercial stocks on land, commercial oil in transit at sea and release of oil from SPRs is currently buffering the situation.

But we are running the buffers down day by day. As a result we see gradually increasing stress here and there in the global oil market. Asia is feeling the pinch the most. It has very low self sufficiency of oil and most of the exports from the Gulf normally head to Asia. Availability of propane and butane many places in India (LPG) has dried up very quickly. Local prices have tripled as a result. Local availability of crude, bunker oil, fuel oil, jet fuel, naphtha and other oil products is quickly running down to critical levels many places in Asia with prices shooting up. Oman crude oil is marked at $153/b. Jet fuel in Singapore is marked at $191/b.

Oil at sea originating from Strait of Hormuz from before 28 Feb is rapidly emptied. Oil at sea is a large pool of commercial oil. An inventory of oil in constant move. If we assume that the average journey from the Persian Gulf to its destinations has a volume weighted average of 13.5 days then the amount of oil at sea originating from the Persian Gulf when the the US/Israel attacked on 28 Feb was 13.5 days * 20 mb/d = 269 mb. Since the strait closed, this oil has increasingly been delivered at its destinations. Those closest to the Strait, like Pakistan, felt the emptying of this supply chain the fastest. Propane prices shooting to 3x normal there already last week and restaurants serving cold food this week is a result of that. Some 50-60% of Asia’s imports of Naphtha normally originates from the Persian Gulf. So naphtha is a natural pain point for Asia. The Gulf also a large and important exporter of Jet fuel. That shut in has lifted jet prices above $200/b.

To simplify our calculations we assume that no oil has left the Strait since that date and that there is no increase in Saudi exports from Yanbu. Then the draining of this inventory at sea originated from the Persian Gulf will essentially look like this:

The supply chain of oil at sea originating from the Strait of Hormuz is soon empty. Except for oil allowed through the Strait of Hormuz by Iran and increased exports from Yanbu in the Red Sea. Not included here.

Oil at sea is falling fast as oil is delivered without any new refill in the Persian Gulf. Waivers for Russian crude is also shifting Russian crude to consumers. Brent crude will likely start to feel the pinch much more forcefully when oil at sea is drawn down another 200 mb to around 1000 mb. That is not much more than 10 days from here.