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EU carbon scheme seen net long by 126 million mt: Barclays


August 3, 2009 - The EU Emissions Trading Scheme is likely to be net long on EU Allowances by 126 million metric tons of CO2 equivalent overall during its 2008-2012 Phase II period, according to analysis released July 22 by Barclays Capital. (See related chart: EU CO2 price trend, July 2008 - July 2009.)


The forecast represents a reduction from the bank's previous estimate that Phase II will be net long by 153 million mt. As such, the report is more bullish than the bank's previous estimate, but Barclays said the outlook for carbon prices is still bearish in the medium-term.


"A slight improvement in the macro and industrial output outlooks has meant that our market balance for the phase has improved. However, we still expect the market in the second half of the year to be dominated by more industrial selling," the bank said.


"Against this backdrop, the current price rally seems like a final trading surge before the pre-August holiday period sell-off. By early September, we expect EUA prices to be finding a much lower level."


EUAs for December 2009 delivery on the over-the-counter market posted a modest rally in July, rising from €13.20/mt ($18.74/mt) on July 1 to €14.465/mt on July 21, according to Platts assessments.


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In the report, Barclays forecast that EUA prices will average €11.50/mt in Q3 and Q4 2009, rising to €14.00/mt in 2010 and €20.00/mt in 2011-2012. In the scheme's third phase, which runs from 2013-2020, the bank forecasts an average price of €40.00/mt.


New caps will be imposed in Phase III which will see a reduction in the availability of allowances as well as a move away from free allocation toward more auctioning of allowances by EU member state governments.


"2013 remains a net short of 183 million mt, and given the ability to bank between phases, which could affect pricing as early as H2 2010, this should provide price support in the second half of this phase [2008-2012]," the bank said.


"The price support comes from the hedging activity of the power sector, which will be hedging more of those 2013 short positions as we approach that date. We expect to see this really start in earnest in H2 2011, although the timing of the release of 2013 EUAs will be important here," it said.


"Although emissions begin to increase in 2010, due to moderate economic growth, the still-poor performance of industrial output will keep those emissions increases in check," it said.


"The net long position in the market increases in that year due to the increase assumed in the cap, with more NER [New Entrant Reserve] being allocated to new power sector installations. We note that due to the large fall in 2009 output, coupled with a very moderate improvement in subsequent years, emissions do not get back to 2008 levels until 2012," said Barclays.


In the nearer-term, Barclays said there could be a rush to sell EUAs by industrials that hold a surplus, particularly as greater value can be monetized if this is done before prices take a dip later in 2009.


"In our opinion, this rally [in July] will end and should be replaced with a sustained price correction in the second half of the year when industrial length starts to come to market in greater volumes. This will occur when industrials begin to have a better feel for what surplus emission volumes are available for selling and is likely to be particularly true of smaller installations that only look at emissions in line with year-end compliance obligations," the bank said. (See related chart: EU CO2 volume and price, July 2008 - July 2009.)


"This suggests heavy downward price pressure at year-end but also points to significant first mover advantage, with the best prices being paid to industrials that manage to bring some length to market early in the year," it said.


"We also expect there to be natural selling pressure by the end of July when many long speculative positions will be unwound -- just prior to traders going on holiday in August. Indeed, we think this could be a natural break in the market and could signal the start of a correction that will begin to align prices with the current supply-demand balance," said Barclays.


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