European carbon prices reversed most of the rally triggered by the EU ETS review proposal, with the Dec’26 EUA contract settling at €81.73 on Tuesday, around €5 below its settlement level a week earlier.

The initial speculative rally quickly ran out of momentum as fresh buying interest failed to emerge. As a result, EUAs recorded a fourth consecutive session of losses, a rare streak last seen in March, when the market reacted to expectations of an EU ETS review aimed at curbing high carbon prices.

The latest Commitment of Traders data released by ICE showed that investment funds increased their net long position by 5 million allowances as of 24 July, reflecting a combination of fresh longs and short covering. The positioning data suggests that speculative buying may have played a role in last week’s 5.4% rally.

Trading activity also eased back to normal after the surge that followed the EU ETS review proposal. Average daily volumes dropped from around 27 million allowances to 18.7 million allowances in each of the first two sessions this week, as the summer holiday period dampened market participation.

After a subdued start to Wednesday’s session, EUAs moved into positive territory in the afternoon. European front-month TTF gas prices also strengthened, supported by renewed geopolitical tensions in the Middle East, while persistent heatwaves across Europe continued to underpin bullish sentiment.

Looking beyond the near term, the outlook for August remains supportive. As the market continues to digest the EU ETS reform package, participants are gradually refocusing on fundamentals, which continue to point to a tightening supply-demand balance, at least for the remainder of this year. Although the proposed changes imply additional allowance supply, they are unlikely to materially alter the near-term outlook.

However, geopolitical developments in the Middle East are likely to remain an important driver of market sentiment in the coming weeks. While higher gas prices tend to support carbon by improving the economics of coal-fired generation, persistently elevated energy costs could eventually weigh on economic activity. Slower industrial production would reduce emissions and, in turn, weaken compliance demand for EUAs.