The Commitment of Traders report and EUA prices in 2024

Does the Commitment of Traders report data drive EU ETS carbon prices? Or do carbon prices affect trading behavior and market positioning? Who came first - the chicken or the egg? Over recent months, EUA prices have declined due to increased supply volumes, (introduced by regulators as a stability measure amidst the conflict in Ukraine), coupled with muted industrial activity and a mild winter. But this downward trajectory has been exacerbated by the selling activity of speculators. Investment funds started selling more contracts following the start of the operation of the NextGenerationEU package in 2021 - it is the predecessor of the RepowerEU scheme, which is now a major factor contributing to the price decline. But generally, in financial markets, when many participants hold short positions, as observed in the EU ETS presently, there can be a "short squeeze." This engenders a surge in buying activity as individuals seek to cover their previously sold assets, and prices are driven upwards. Should such a short squeeze materialize in carbon markets, it would result in an increase in EUA prices.

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• What does the Commitment of Traders report show for carbon markets? 
• What does the Commitment of Traders say about Investment Funds in the EU ETS? 
• The Commitment of Traders report and EUA prices in 2023 and 2024
• What is the forecast for EUA prices in 2024 and Commitment of Traders report data? 

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What does the Commitment of Traders report show for carbon markets? 

What is a Commitment of Traders report? 

As seen in our previous article, the Commitment of Traders (COT) report is a weekly publication, showing the positions of various market participants in financial markets. It categorizes market participants into groups: 

• Investment firms;
• Investment funds;
• Other financial institutions;
• Commercial enterprises;
• Operators subject to compliance obligations.

The report offers information on the positioning and market sentiment of these groups, helping decision-making processes for investors and traders.

What does the Commitment of Traders report look like and how should we read it? 

In the top row, the participant categories are listed, while the first column presents the metric under consideration. "Number of positions" denotes the quantity of contracts bought (long) and “sold” (short). The "change since last report" indicates the week-over-week change. "Open interest" is the total of all derivatives contracts in a market held by participants at the end of a specific day.

What is the “Investment Funds” category of the CoT report?

In the Commitment of Traders report, investment funds include various types of institutional investors, such as hedge funds, commodity trading advisors (CTAs), and commodity pool operators (CPOs). They participate in futures markets for speculative purposes, aiming to profit from price changes. Tracking the positions of investment funds in the COT report provides insights into the speculative side of the market sentiment and potential price movements. 

What is the most important category of the Commitment of Traders report in carbon markets?

Every Wednesday, discussions in the EU ETS world are regarding the net positioning of investment funds - everyone wants to know what their market sentiment through their trades. Indeed, compliance players are obligated to purchase EUAs to align with their emissions, irrespective of market dynamics, due to regulatory requirements. So, their weekly positioning does not tell us where they believe that the market will go.

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What does the Commitment of Traders say about Investment Funds in the EU ETS? 

What does “net positioning” mean in the Commitment of Traders report? 

The chart below illustrates the difference between the quantities of EUAs purchased and sold by investment funds. An upward trend indicates that investment funds are buying more than they are selling, showing market short/medium term optimism. Conversely, a downward trend suggests their anticipation of potential price decreases in, engendering increased selling activity. “Net short” is a financial position where an investor has more short positions (betting on the asset's price to decrease) than long positions (betting on the asset's price to increase).

What has the Commitment of Traders report shown in the past regarding carbon markets?

Prior to the summer of 2022, investment funds exhibited a pattern of purchasing more EUAs than they were selling (upward slope on the graph). However, this trend shifted afterward. Since then, they have been consistently selling more EUAs than they have been buying, leading to a current state of being "net short" – where they have sold more EUAs than their total purchases.

Why do investment funds sell EUAs?

The shift in positioning trend among investment funds coincides with the implementation of the NextGenerationEU package. This document is, to simplify,  the predecessor of the RepowerEU package. This package is now the primary factor driving the decline in prices within the EU ETS. This is due to the additional volumes introduced into the market in 2023 and 2024. Hence, since 2022, investment funds may have been anticipating those market dynamics because of the supply changes, and they have been increasing their selling activity in EUAs.

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The Commitment of Traders report and EUA prices in 2023 and 2024

The Commitment of Traders report and EUA prices since August 2023

For the past consecutive 33 weeks, investment funds have had a net short position - consistently selling more EUAs than they have bought. This ongoing selling behavior is correlated with the EUA price decrease (-34% in price), though the direction of the causality cannot be established. On average throughout 2023, investment funds held 27.8 million metric tons (mt) in long positions and 36 million mt in short positions. Presently, they hold 35.7 million mt in long positions and 65.3 million mt in short positions - a “net short” larger than usual.

The Commitment of Traders report and EUA prices in March 2024 

This March, we are seeing signs of recovery in EUA prices for the first time in almost a year - carbon prices increased from €50.60 on February 24 to €59.58 on March 19. At the same time, for 3 consecutive weeks, investment funds have reduced their short positions (reduce the difference between sold and bought carbon contracts). Indeed, EUA prices have increased 17.7% during this period, and investment funds have decreased their short positions by 25%.

What is the EU ETS price forecast for 2024? 

In financial markets, an excess of short positions can trigger a phenomenon known as a short squeeze - this makes demand and prices surges rapidly. This happens if short sellers rush to “cover” their positions by buying back the assets they previously sold short. So, this heightened demand often leads to a notable uptick in prices.

We can expect investors to start buying back their EUAs soon and drive prices up, just one more reason why 2024 is a good time to invest in carbon markets. In March 2024, the carbon allowance price was around €55, with analysts anticipating an average rise to €70.55 by year-end (22% increase). 

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