One Market Is Making a Big Bet That Lockdowns Will Soon Loosen

(Bloomberg) --

The cost of pollution is headed for its biggest weekly gain in more than two years in Europe on optimism that the economy is preparing to snap back from coronavirus-imposed lockdowns.

After falling 25% in March, the price of permits to emit carbon dioxide is still well below where it started the year. The gains are a sign that investors are making bets on industrial production recovering and governments looking for ways to loosen restrictions on activity.

“It looks like carbon is currently in the hands of speculative positions, taking the momentum from the wider uptick in financial markets,” said Marcus Ferdinand, head of EU power and carbon analytics at ICIS.

Higher carbon costs add to the cost of electricity and have helped pare declines in German and French power contracts, most of which have registered strong gains in the past five days.

Carbon for delivery in December is up almost 20% to 21.16 euros a ton. That compares with a low this year of 14.34 in March and as much as 29.95 a ton last year.

The options market has been signaling carbon prices will move higher, with more investors making bets that the market will rise than those who are betting on a fall. The call with the most open interest is the option to buy at 65 euros a ton, more than triple the futures price. Open interest is a measure of market bets that have not closed.

Bidding in the almost-daily auctions of carbon allowances has been mixed. The average cover ratio so far this month is 1.7, down from 2 last month, according to data from the European Energy Exchange AG.

Buying activity has been boosted in April because factories, power stations and airlines in the system need to hand in allowances by the end of this month to cover 2019. Next month, the compliance purchases will wane.

As economies remain shuttered, the impact could reverse some of carbon’s gains.

“The sudden shut-down of the European economy with a strong decline in the use of coal-fired power generation justifies a price reduction in the short term,” Barbara Lambrecht, an energy analyst at Commerzbank AG, wrote in a note.

©2020 Bloomberg L.P.