Still betting on black?

A deep dive into EUA futures and options activity, physical allowance demand and real time emissions data

“The economy is not the market, and the market is not the economy.” - anonymous

In theory at least, the EU carbon futures market is a forward looking mechanism whose participants collectively attempt to price in future demand and supply of emission allowances. However, sometimes markets anticipate something happening in the real economy, which then never really materialises, or at least not as soon or as bad as first feared (see What price King Coal's return to Europe?).

In this article I delve into recent developments in EUA futures positioning, what’s been happening in the options market, why futures market liquidity is still a big problem, the demand for EUAs at auction and finally look back at what has actually happened to EU carbon emissions.

First, lets start with positioning in the EU carbon futures market. In the last week of October, EUA prices posted their largest weekly gain in five years, surging 22% during intra-day activity to over €80, before retracing slightly to ~€76 by the end of last week. In Return to the 70's I speculated that the speed of the rebound in prices suggested plenty of short covering by investment funds.