Investment funds are increasing their exposure in the EU carbon market while curtailing positions in the natural gas market amid a shift in fundamentals expected from 2026 onwards.

The long-standing correlation between gas and carbon markets has been breaking down over the previous months as EU Allowance prices diverge from Dutch TTF natural gas counterparts.

The divergence has amplified since the start of Q2 this year. The correlation coefficient between the prices of both markets was 0.45 in 2024, and further strengthened to 0.91 in Q1 2025, before flipping to -0.41 from Q2 to date.

As additional LNG supply is expected to hit European ports from next year onwards, gas and LNG future prices have turned bearish, with the front-month TTF contract dropping 40% since the beginning of the year and 38% from the same time last year, according to Platts data.

The trend continues to support the bearishness with the Dutch TTF price dropping below Eur30/MWh during the intraday trading session of Nov. 24 as traders eye a proposed Russia-Ukraine peace plan.

Meanwhile, EUAs have turned bullish, with the market holding above the Eur80/mtCO2e psychological level for two consecutive weeks.

Price movements mirror fund positions

Supply tightness is anticipated from next year as EUAs get withdrawn from circulation, in line with key adjustment mechanisms under the EU Emission Trading System.

On the other hand, the gas and LNG markets have been clouded with bearishness.

The bullish factors emerging from uncertainties in 2024--- EU's 90% gas storage targets, Russia-Ukraine gas deal expiry, Germany's proposal to finance storage filling, among others-- are no longer providing the speculative support to prices they had been.

Financial entities active in these markets are taking advantage of these dynamics, extending their exposure in one market, while curtailing bets in the other.

According to the latest ICE Commitment of Trade Report for the week ending Nov. 14, investment funds reduced their net long positions across Dutch gas contracts to 15.6 million lots, registering a 36% decline on the week, and marking the weakest net-long position since the week ending March 15, 2024, when the funds held a net short position.

In contrast, funds active in the carbon market increased net long positions to 102 million, marking a 4.5% weekly increase and the longest positioning since May 2021.

"Funds usually switch between carbon and gas. We saw that last year, too, when the funds started to ease their net long positions", a UK-based carbon analyst told Platts. "So, gas is forecasted to be bearish in the near to long term, with more LNG terminals coming online, whereas EUAs are forecasted to be bullish, especially in 2026 and 2027."

LNG supply aiding bearish gas outlook

The bearish tone across the gas complex remains anchored by the steady influx of LNG into Europe. Both European LNG and gas benchmarks have traded in a tight range in recent months, supported by abundant LNG arrivals, strong storage levels, and muted demand, which together have kept the market largely balanced.

Platts assessed the DES Northwest Europe LNG price for January delivery at $9.756/MMBtu Nov. 21, or at a discount of 45 cents/MMBtu versus Dutch TTF, the lowest outright price since July 2024.

Record US LNG exports are adding to the pressure. October shipments hit an all-time high of 10.45 million mt, up nearly 36% year on year, with 78% of volumes still flowing to Europe amid a closed arbitrage to Asia, according to S&P Global Energy data. This influx has further strengthened Europe's supply cushion.

Regional gas inventories stand near 79% full, according to Gas Infrastructure Europe data, a comfortable level heading into the latter half of winter procurement and one that reduces the urgency for additional spot buying.

Looking further ahead, the structural picture points to additional downward pressure. Global liquefaction capacity is expected to climb sharply-- from about 463 million mt/year in 2024 to 512 million mt/year in 2026, and then to around 710 million mt/year by 2030, according to S&P Global data.

Bullish trajectory for EUAs

Bullish fundamentals, including an expected reduction in carbon permits in circulation in the EU's cap-and-trade system starting next year, combined with declining temperatures and rising power-generation demand across Europe, have supported carbon prices.

The Market Stability Reserve, a key supply-demand mechanism under the EU ETS, is set to absorb allowances from circulation next year. Auction supply in the primary market is expected to decrease by about 1% throughout 2026, according to European Energy Exchange auction schedules.

Furthermore, an end to supplementary auctions is expected under REPowerEU, the EU's 2022 plan to reduce reliance on Russian fossil fuels and accelerate a green transition.

A reduction in free allocations for industries subject to the Carbon Border Adjustment Mechanism is also expected. No free allocations will be given to the aviation sector, and coverage of the maritime sector will expand, putting a strain on demand for carbon permits.

Analysts at S&P Global Energy Horizons expect EU Allowance prices to average Eur85/mtCO2e in 2026, considering the tightening supply picture.