(Bloomberg) -- This year’s strong correlation between natural gas and carbon prices in Europe has broken.
December carbon contracts fell 6.5% week-on-week to close at €62.05 a ton on Friday, the lowest in almost six months. But gas prices rallied 7.5% during the period as Middle East tensions escalated, fueling fears of supply disruptions.
Carbon may decline further as high renewables output reduces the need for fossil-fueled generation, though gas-price gains have spurred a shift to coal-fired production in some places, according to Oslo-based analysis firm Veyt.
“The correlation between gas and carbon prices has dropped, and the increased geopolitical tension impacting gas and fuel markets is not reflected in the carbon market,” Veyt said in a note Monday. “The bearish technical momentum built last week, with the carbon price breaking below several support levels.”
Energy traders are continuing to monitor the supply picture as Europe’s heating season gets underway, since a broader Middle East conflict may threaten flows. Israel has ramped up strikes in Gaza and Lebanon, and the market is also waiting for possible retaliation against Iran for a missile assault last week.
European power prices followed gas higher at the end of last week. The German 2025 contract closed at €87.64 Friday, but fell Monday.
--With assistance from William Mathis.
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