The correlation between the European carbon market and gas prices has increased lately. Both commodities have performed similarly with gas prices being undoubtedly the dominating factor.

Last week, TTF gas prices rallied more than 30% amid geopolitical concerns in the Middle East, sabotage worries regarding the pipeline under the Baltic Sea combined with colder weather forecasts.

As expected, the sentiment was bullish on the carbon market as well, supported mostly by the increases in the gas markets. However, the gains were less pronounced, with EUAs posting just a 7% weekly rise.  

Nonetheless, gas prices fell around 10% on Monday, with “traders weighing milder weather forecasts and international efforts to contain the conflict in the Middle East”, as stated by Bloomberg. Temperatures in Germany, Europe’s biggest gas market, are now expected to be 40C higher than previously forecast. Also, in northwest Europe, the weather should be milder through most of the month.

Furthermore, the latest data published by Gas Infrastructure Europe revealed that, as of 15 October, gas storage facilities in the EU were 97.95% full.  Gas deliveries from Norway, based on data provided by Gascco, stood this morning at 329 mcm/day, more than double from what it was one month ago.

The European carbon market reacted promptly to the fiercely falling gas prices yesterday. The EUAs dropped 3,03% on its previous settlement with a weak auction adding to the downside. The sale for 3,04 million allowances on the primary market closed at €83,40 with a cover ratio of just 1,88, suggesting limited demand.

Looking ahead, mild weather and weak industrial power demand should continue to weigh down the carbon market. Still, as the EUAs remain closely linked to TTF prices, we expect carbon prices to remain more sensitive to risks that are specific to the gas markets than to general risks such as economic outlook.