European carbon prices ended little changed on Friday, retreating from a four-day high touched early in the session to post a 4.6% weekly drop – the smallest posted so far this year.
Front-year EU Allowance futures trading on ICE closed down 2 cents at €6.07 after trading as high as €6.28 in the first hour of trade.
“A lack of follow through in either direction points to a dazed and confused market but, for the first time this year, a relatively stable one,” said Redshaw Advisors in an emailed note.
Volume on the bellwether contract at 23.2 million was modest compared to recent activity.
More than 25 million EUAs changed hands in the form of block trades across the spot, Dec-16, 17, 18 and 19 futures. The majority of this volume appeared to be linked to spread trades.
Carry trade yields on the further out contracts fattened this week as the underlying futures prices slid.
For example, the annualised return for buying the Dec-17s and selling the Dec-19s rose to hit 2.326% this week, up from 1.836% at the end of 2015.
Similarly, the Dec-18 to Dec-19 spread increased to 2.698% as of Tuesday’s close, from 1.993% on Dec. 31, 2015. (See below for our weekly table of annualised carry trade yields)
This could indicate more demand for the farther out contracts, selling pressure directed at the nearer ones, or a mix of both.
Carbon managed to hold its ground Friday in the face of a softer euro and weaker German baseload power prices, which dropped by more than 1% across the board on Friday.
European coal also eased slightly, but it wasn’t enough to ward off a sharp drop in German clean dark spreads, denting the incentive for utilities to buy carbon.
EUA prices were also unfazed by Friday’s auction, which saw Germany sell 3.495 million spot EUAs for €6.06 each, in a sale that cleared a cent below market and attracted bids from 20 participants totalling 6.53 million units.
The sale marked the final auction for January, a month that saw 48.29 million allowances sold, which is below the 2016 average of 61.15 million/month.
The sales fetched an average €6.49 per allowance, cleared on average at 2 cents below the secondary spot market, and recording a mean bid-to-cover ratio of 2.23 – the lowest since April 2015 and well below last year’s average of just over 3.
Average bidder participation was 20.6, which was the most since Jan. 2014, indicating that, despite the drop in EUA prices, there is renewed interest amongst companies in taking part in the auctions.
Auction volumes ramp up to 69 million in February, meaning more supply-side pressure will be exerted on the fragile market, possibly starting next week when sale quotas edge up to 17,296,000 from 17,259,500 this week.
Despite hitting a 20-month low of €5.61 on Tuesday, this week’s 4.6% drop was the lowest recorded on the Dec-16s so far this year, following respective declines of 9.9%, 9.9%, and 5.4% posted in the first three weeks of January.
Below are this past week’s EUA auction results, featuring the clearing price, distance to spot price on ICE at the time the sales ended, and bid-to-cover ratio:
And next week’s scheduled EUA sales:
|Implied EUA carry trade annual returns||German clean dark spreads|
|Dec-16||Dec-17||Dec-18||Dec-19||Cal Yr||Price||Wk chg|
|Dec-18||2.556%||(based on 36% efficiency factor)|
|(does not include transaction costs)|
By Mike Szabo – email@example.com