Emission rights reflect weak oil demand

Prices of EU Allowance (EUA) of the European Union Emission Trading Scheme have kept clear downtrend since mid-2011. EUA recorded the lowest price in the phase II period (2008-2012) on Wednesday at € 6.45/ton.

EUA prices dropped below € 1/ton in late 2007 because of large amounts of excess emission rights that were scheduled to be invalidated by the end of the phase I period (2005-2007). However, under the current rules, European companies can carry over their excess emission rights to the next phase III that will start in 2013.

Companies are not necessary to rush to sell their emission rights within this year. Meanwhile EU-ETS operators have encouraged players to buy EUA at cheap prices because emission rights are likely to be more valuable in the phase III period due to tighten regulations.

Weak EUA prices despite those situations suggest that energy demand in European industries remains weaker and that pessimistic forecasts for the regional economic activities are dominant in the market.

Some companies are likely to accelerate the EUA price decline. They are facing shortage of running funds due to the decreased credit line and may try to sell their emission rights for cash.

Demand for the emission rights is deeply affected by energy use because almost 90% of greenhouse gas is generated from energy consumption.

When you compare the demands of petroleum products in the U.S. and Europe for a couple of years before and after the Lehman shock, demand in the U.S. shrunk by more than 7% after the severe economy crisis, while decrease in European demand stayed at about 6.5%.

It could be one of reasons for the wider Brent premium over the WTI crude oil in 2011 besides the heavy crude oil stocks at the U.S. Mid-West and the supply concerns for the Middle East and North Africa.

Does the bearish sentiment projected by the weak emission rights market lead the Brent premium narrower in the near term?

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