Photographer: Daniel Acker/Bloomberg

Another Chance to Join Commodity Rally You Probably Missed

  • Carbon allowances forecast to rise about 39 percent this year
  • Falling natural gas pushing prices lower so far in 2016

Traders and investors have another chance to join a rare commodity rally that probably passed them by last year.

European Union pollution permits, beaten only by London cocoa in 2015, may have further to roll. Spurred by European Union lawmakers in Brussels, the contracts are poised to gain about 39 percent in 2016, after a poor start to the year, according to a survey of 13 traders and analysts by Bloomberg. That would be a record third year of gains after prices climbed 11 percent in 2015.

What makes the EU’s $42 billion emissions-trading system different from other markets is that it was created as the key tool in the bloc’s strategy to reduce global warming. Much of the advance in carbon prices over the past two years was underpinned by policy makers changing market rules to reduce a permit surplus.

“The system is getting tighter on a yearly basis,” said Philipp Ruf, the lead analyst for EU carbon markets at research firm ICIS Tschach in Karlsruhe, Germany, who’s tracked the market for five years. “By implementing reforms, which curtailed auction volumes, EU regulators brought scarcity back.”

EU emissions contracts are expected to rise to 9.25 euros ($10.31) a metric ton, according to those surveyed by Bloomberg. Year-end price estimates for the benchmark December contract ranged from 7.50 euros to 12 euros. The futures traded at at 6.65 euros at 11:40 a.m. on ICE Futures Europe in London.

The market isn’t for the fainthearted. Prices already plunged 20 percent this year, wiping out all of last year’s gain as the allowances tracked a slump in energy commodities from oil to coal and natural gas. A 48 percent surge in 2014 followed a 26 percent plunge the previous year.

Some of the price swings followed political statements or regulatory changes to the EU’s carbon market, a form of intervention that may put off investors, according to traders including Louis Redshaw at Redshaw Advisors in London

Whipsawed Prices

“The oversupply and repeated policy changes to fix it have caused carbon prices to whipsaw, which is one factor that deters investors,” said Redshaw, who used to trade the permits for Barclays Plc. Money managers will be more comfortable buying after the measures taken by the regulator are completed, he said.

Trevor Sikorski, the head of carbon, gas and coal at Energy Aspects Ltd. in London, an industry consultant, may cut his fourth-quarter forecast of 10.50 euros a ton as natural gas prices extends declines, he said. U.K. gas fell 33 percent last year on ICE Futures Europe and has lost another 6 percent this year.

While utilities burning gas only require about half the allowances as those using coal, current price levels aren’t anywhere near the 21 euros needed to encourage utilities to burn gas rather than coal.

The EU’s cap-and-trade program gives away or auctions allowances to about 12,000 factories, utilities and airlines, which need the permits to match their carbon dioxide output or pay fines.

Prices are still seen supported by the EU’s efforts to combat a surplus of permits that had ballooned to a full year’s supply and pushed carbon to the lowest since 2007. The bloc’s regulator this year concludes a program to hold back allowances from weekly auctions, and it plans to start in 2019 a permit reserve that will automatically control supply.

“Lawmakers have done all they can to deal with the surplus,” said Anatoly Stolbov, an analyst at Virtuse Energy s.r.o., by phone from Prague. “Prices should go substantially higher,” rising above 8 euros a ton by the end of the year, he said.

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