Carbon Bets Shift to 2021 With This Year Unsettling Traders

(Bloomberg) -- This year has become so filled with uncertainty for the energy market that traders focusing on emission allowances have shifted their eyes toward what will happen in 2021 when prices are expected to be higher.

Open interest in the European Union’s 2021 benchmark carbon contract, a measure of trading positions that haven’t been closed, has surged the past two months. Bets for this year’s December future are stagnant.

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That reading suggests there’s too many unknown factors influencing the cost of pollution credits for traders to take a chance. Carbon has fallen 17% in the last four months, much less than the drop in natural gas and electricity prices in most European markets.

While demand for energy has slumped -- taking with it the need for thousands of polluters to pay for allowances that cover their emissions -- the outlook for the rest of this year depends on how quickly economies bounce back from the coronavirus and whether there’s a severe second wave of infections. With no answers to those questions at the moment, traders are more comfortable dealing in 2021 allowances, when the expectation is that economic activity will be picking up again.

The emissions market is a crucial variable for power generators, airlines and factories as well as the EU’s fight against climate change. The cost of those allowances now underpins about half of the region’s wholesale electricity prices. Fuel costs are the rest.

Following are views from a few of the analysts following the world’s biggest carbon market:

Nigel Felgate, portfolio manager at Carbon Cap, an emissions trading fund:

• The demand cut this year could be as much as 400 million tons, about 25%, or as little as 100 million tons.
• Lower expected nuclear output is temporarily holding up prices.
• “There could be a serious amount of demand destruction, potentially knocking the tightening of the EU emissions trading system back a year. There’s some doubt the auction supply will continue to get soaked up.”

Ingo Ramming, head of corporate and investor solutions at Commerzbank AG in Frankfurt.

• Factories, power stations and airlines are moving focus to 2021 because they need fewer allowances this year than previously anticipated.
• “Some companies are ‘over-hedged’ after the significant drop in power demand and industrial production.”
• There’s subdued demand for carbon once it rises above 20 euros ($21.47). It fell 1.4% to 20.74 euros a ton on Friday.

Jahn Olsen and Bo Qin, analysts in London at BloombergNEF

• EU allowances since the middle of last month rose as high as 22.55 euros a ton after bottoming out this year at 14.34 euros on March 23.
• “Increased thermal generation will increase demand, but nowhere near enough to make up for the loss of demand due to Covid-19.”
• The price of carbon has dropped back, supporting the theory that the rally was overdone.

Morgan Stanley analysts including Jessica Alsford, managing director and head of the global sustainability research team

• “Policy makers’ focus is on the short term at the moment,” yet the virus response probably won’t derail the EU’s plan to cut emissions at least in half by 2030 versus 1990.
• The level of the target is crucial for the market, because it sets supply -- a stricter cap makes allowances more scarce and increasingly valuable.

Trevor Sikorski, analyst at Energy Aspects Ltd.

• Prices should average about 23 euros a ton this year, and much higher next year at 33 euros.
• “One of the sectors most acutely affected in the EU emissions trading system is aviation. We are now forecasting a 31 million ton -- 45% -- year-on-year reduction in aviation emissions for 2020 given the current near-grounding of European aviation.”

Jan Kresnik, a portfolio manager at Belektron, a brokerage in Ljubljana, Slovenia

• There are only a few days until the end of the month, when emitters must hand into regulators allowances to cover 2019 emissions.
• The “majority of the companies have already completed their purchases for the year. The recent demand that we have seen must therefore be coming from other sources such as speculators. It’s difficult to predict the direction of the next price move.”

©2020 Bloomberg L.P.