Return to the 70's

What's behind the surge in EU carbon prices?

EU carbon prices have surged by around 15% over the past three trading days to ~€77 per tonne.

€76-€78 per tonne was a key support level during Jan-Feb, and then again from mid-March through to the end of August. The rebound in prices marks a return to this level, and for the moment at least represents resistance to higher prices.

The big short gets squeezed

Recall that investment funds have been sitting on a record short position on EU carbon prices. That bet has paid off as carbon prices plummeted from near €100 per tonne in late August to the mid-60’s. However, the speed of the rebound in prices over the past few days points to plenty of short covering.

The latest Commitment of Traders (CoT) report is due to be published today (Wednesday 26th Oct), but we’ll probably have to wait until next weeks report to find out the real extent to which funds have unwound their short positions (see The big short: Record net short position underlines the extreme negative sentiment towards carbon).

The carbon market is no different from any other, it moves in the path of least resistance.

What then do the fundamentals indicate?