EU carbon slumped for the fifth straight session on Friday as bullish traders looked in vain for signs of a rebound after a volatile first week of 2015 that saw prices fall to their lowest for almost a year.
The Dec-16 EUA contract settled down 14 cents at €7.46 on ICE, near the bottom of the day’s €7.44-7.70 range, on heavy turnover of 16.7 million. Most of the fall came in the last 30 minutes of the session.
The brisk trade compared with earlier in the week but Friday’s decline was less steep than the 41-cent and 30-cent drops notched over the previous two days.
The benchmark carbon contract also held above the week’s bottom and 11-month low of €7.40 touched on Thursday, which some traders took as a sign that carbon could mount a recovery next week.
“Power dropped again today but EUAs mostly held ground, so there is hope [of a rebound],” said one.
Baseload next year German power prices fell 24 cents to €25.30/MWh to continue the week’s rout in that market. Prices have now slumped 5% since the 2015 close, denting prospects that utilities will enter the carbon market to buy aggressively to start the year.
Yet a strong euro and weaker coal prices, along with lower carbon, served to slightly improve profit margins for coal-fired generation. The German clean dark spreads for 2017, 2018 and 2019 have all fattened across the week, according to Carbon Pulse calculations.
Higher spreads, forecasts for a dip in temperatures in Germany, and the resumption of EUA auctions next week are all providing encouragement to bullish carbon traders.
The absence of some major utilities from the buyside has been identified as a reason for carbon’s collapse this week and some dealers expect the return of government sales to trigger a resumption of utilities hedging their future output.
“I expect big players to take positions during the auction, and if it’s a strong result it might send a positive signal to the market,” the trader said.
Next week lines up a full calendar of five morning sales, offering up 17.3 million spot EUAs after a three-week pause. Weekly auction volume will on average be around 2 million EUAs higher than in 2015, with around 100 million more allowances coming to market this year compared last.
Market participants are generally expecting prices to rebound as Backloading continues to curb auction volume. However, some predict this will happen within the next few sessions, while others feel it could take two or three months for prices to claw back this week’s 83-cent loss.
This week’s fall has also been largely attributed to speculators, with many long positions flushed out as stop-loss after stop-loss got triggered on the way down. The Dec-16 future’s Relative Strength Index ended just below 25, still well below the 30 mark that signals a contract is oversold.
By Ben Garside – ben@carbon-pulse.com
