The mirage of future demand

It is well accepted that EUA prices are nothing less than the actual price of a forward long-term contingency representing the future deficit on the EU ETS. Dealing with a contingency in an incomplete market heavily driven by regulatory policies, its price is not well determined and has a wide range with which to provide an acceptable price, thereby implying huge volatility. And yet the demand is probably the only objective factor in the whole mechanism.

The energy sector, accounting for 75% of the EU ETS allocations, is the only sector showing a deficit for the foreseeable future. For 2012 we could foresee between 150-160 millions of tons of deficit for the sector. At first sight, the numbers are encouraging but if we look to the open interest on the Dec 12 flows we see that both utilities and institutions built robust positions despite the negative trend of EUA prices. Given the actual level of 280 million tons of open interest the remaining deficit for utilities is around 20-30 MT. Moreover, the demand of free EUAs from the ex-socialist block countries is a serious diminishing factor for the post-2012 demand.

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