February Market Commentary

Commentary by Carbon Cap Management LLP – A Thornbridge Appointed Representative
Equity and Commodity Markets
Equity markets continued their rally in February, with the S&P 500 rising by +5.2%, having now been positive in 16 of the last 18 weeks and hitting new all-time highs. The Bloomberg Commodity Index ended the month down despite persistent tensions in the Middle East pushing both Brent and WTI Oil up +2.4% and +3.5%, respectively.
Europe Carbon Markets
The EU carbon market maintained its downward trend in February; dropping by a further -13% bringing its YTD performance to -30%. EUAs tracked the negative price action in the wider energy complex, driven mainly by gas market weakness, with the benchmark European TTF gas contract falling below pre-Russia-Ukraine war levels for the first time. A mild February with lower gas and power demand, coupled with ample emissions allowance supply, continued to drive prices lower. On policy, the European Commission proposed a 90% emissions reduction target for 2040 compared to a 1990 baseline, targeting a pathway to reach net-zero emissions in 2050. The UK carbon market posted a modest gain in February as the market found support at the £35/tonne level but it is still down -23% YTD. Despite warmer temperatures compared to seasonal norms, power demand experienced little change from the same period last year. Overall, UK emissions demand was lower but offset by a small resurgence in industrial gas offtake, which rose 3% year-on-year in February. Our valuation models indicate that the significant declines in the EUA and UKA markets over the last 12 months at -39% and -55% respectively, represent favourable entry points for investors with a medium-term view.
US Carbon Markets
In the US, both the RGGI and CCA carbon markets declined in February. The RGGI market dropped slightly after a rally at the beginning of the month which saw prices trade above $17/tonne. Market participants are still anticipating a tightening of market rules in the upcoming program review although no news has been released as to when these will be announced. On fundamentals, cumulative emissions rose 12% year-on-year, driven mainly by higher fossil generation. In the California CCA market prices drifted lower despite a strong first auction of the year, with the price clearing at $41.76/tonne. The auction provided some temporary upside, but bearish pressure came from higher fuel inventories signalling lower transport demand as well as a delay to the public hearing on the low carbon fuel standard (LCFS) amendments.
NZ Carbon Market
In New Zealand, prices fell to near five-month lows in February, driven by uncertainty ahead of the March auction. Prices ended the month down almost -10%, trading near the auction price floor of $64/tonne, which is likely to provide some support to market in the short-term. On the policy side, the New Zealand government announced that it will be carrying out an independent review of the forestry sector of the ETS, specifically focusing on the cost component for forestry entities.
Author: Alex Hackett
Alex is a Business Development Manager and a member of the investment funds team and is involved in portfolio construction, regulatory reporting, trade surveillance and monitoring.