Seasonal shifts in the EU carbon market? Don't bet on it.

“Never cross a river that is on average 4 feet deep” - Nicholas Nassim Taleb

A strong tailwind could be about to give the EU carbon market a lift into year end - if seasonal price trends are to be believed.

The performance of the EU carbon market over the past ten months has broadly followed the seasonal trend observed since the start of Phase III of the EU ETS, beginning in 2013. Based on past performance this suggests that after 3-4 volatile weeks, EUA’s could see strong returns during the first 2-3 weeks of December.

Seasonal trends are often used to give an indication of where particular asset prices may move next. Talk of a consistent seasonal pattern should always be viewed with suspicion though. Seasonal tendencies are just that – tendencies. The existence of such a pattern (at least where the price swing is substantial) would imply that the market is so inefficient that some participants would be able to profit at the expense of others simply by following the calendar.

The most important factor though is that seasonality is simply a statistical characterisation of what has happened in the past. Averages hide all kinds of sins. In the case of financial markets the average performance in any particular week of the year masks wild gyrations around that average. For example, the average EUA performance during week 45 of the year (next week) is -4%, however returns have varied from -12% in 2016 to 7% in 2021.

Seasonality, as well as positioning and sentiment are important factors in timing short term trades in any market, including the EU carbon market. However, for long term investors it is vital that they not miss the forest for the tress. It is much more important to focus on the fundamentals and the long-term trend.