EUAs vs crude oil update

I’ve updated the chart of EUAs vs crude oil (see below). I’ve included some comments based on an incomplete understanding of the dynamic between the two, so any comments would be gratefully received.

For the past year, EUAs have been rangebound between 12 and 16 euros. Oil, conversely, has trended strongly upward from $63 (EUR45) a year ago to a high of $80 (EUR63) a week ago. This is in contrast to the first period shown on the graph, between Jan 2007 and Spring 2009, where EUAs and crude were strongly correlated.

The relationship between EUAs and crude oil is partly that both are driven by overall demand for energy, but this changes over the long-term. The relationship observable in this graph is more likely driven by the ‘dark-spark’ mix of energy production in Europe. This refers to the mix of coal (dark) and gas (spark) in energy generation. Oil prices tend to drive the price of natural gas, which is clean relative to coal. When oil increases in price, energy generators switch to coal and therefore demand for carbon credits increases.

The increase in oil price over the past year would usually indicate a greater proportion of coal going into Europe’s energy supply. However, higher demand for carbon credits has not resulted. The sluggishness of EUAs in responding to oil prices is probably a reflection of poor industrial recovery following the credit crunch.

(click to expand)

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