The European carbon market saw a short downtrend in early trading on Wednesday dropping briefly below €70 for the first time in more than a week. However, the EUAs recovered later in the day and ended up closing with 1% increase.

The turnaround was attributed to the lack of auction supply on both Tuesday and Friday due to Ascension day, a national day across several European countries. Furthermore, the latest Commitment of Traders report showed that investment funds have continued to reduce their market’s net short positions from 41,9 million allowances in December to just 12,7 million allowances last week.

Source: Commitment of Traders

“This trend is seen by the market as a sign that financial investors are turning to a more positive view of the EUA market in the short term,” said Yan Qin, lead analysts at London Stock Exchange Group (LSEG) quoted by Montel News. 

By contrast to the carbon market, gas prices ended the day with a decline of 1,47% amid warm weather and healthy storage levels, ignoring lower flows from Norway due to maintenance works. Furthermore, in Germany, Europe’s largest gas consumer “the weather forecasts indicate more wind for the coming weeks” as stated by Energi Danmark. 

What was particularly noteworthy in yesterday’s trading session was how carbon finally decoupled from the gas market, even though briefly. Historically, gas has influenced carbon prices and in the past few months, the correlation has been stronger than ever. Essentially, when gas prices decrease it becomes more economical than coal leading to reduced demand for carbon allowances as gas is less carbon-intensive.

However, the strong bond between gas and carbon makes sense as long as the European energy market remains reliant on fossil fuels. Given the notable progress toward renewables, it is logical to expect weather conditions such as wind speed or cloud cover to take precedence over gas prices at some point in time, as price drivers on the carbon market.