EUAs ended above €5 for the first time in seven days on Friday as prices were boosted by a strong German auction, higher energy, and short-covering ahead of the weekend, but the gains weren’t enough to prevent EU carbon from notching its sixth straight weekly fall.
The Dec-16 EUA futures on ICE settled up 32 cents or 6.7% at €5.07 to end the week, after trading up to an intraday peak of €5.17 following a burst of afternoon buying.
The gains translated into a week-on-week decline of 50 cents or 9%.
Traders noted that EUAs started to rise early on Friday on the back of modest buying in the first 20 minutes of trade, which was likely linked to firmer oil and power prices, but that the rise gained speed following a strong German EUA auction result.
The EEX-hosted sale cleared at €4.94, some 4 cents above prices in the secondary market, though it saw below average bid coverage of 1.91.
It was the third time an auction has cleared above market this week, bucking the usual trend of a slight discount and suggesting participants were bidding more aggressively to pick up allowances as they hit near two-year lows this week.
EU carbon rose alongside crude, maintaining its recent stronger correlation to oil, but EUAs failed to keep pace as front-month Brent surged by as much as 13% to above $33 after the UAE’s energy minister said OPEC nations were willing to cooperate on an output cut.
The front-year EUAs have fallen by as much as 44% between the last trading day of 2015 and Thursday’s 22-month trough of €4.62.
But with prices staging a convincing comeback from yesterday’s bottom, some market participants are hoping the worst has passed.
“The selling has started to look like it was running out of steam over the past couple days. We’ve fallen a long way in a short amount of time … [but] unless utility buying starts to emerge or shorts take profits, I suppose we could hang around these levels now or even drop further,” one trader said.
Friday’s volume was strong with just under 22 million units changing hands on the bellwether Dec-16 contract.
A further 5.7 million was transacted along the rest of the futures curve, with 5.2 million of that done on the futures for delivery between Dec. 2017 and Dec. 2020, contracts used by utilities to hedge the carbon leg of their forward power sales.
“[Friday’s] gains may be a result of an end-of-week shorts’ close out, just in case there is bullish market news over the weekend,” said Tom Lord of Redshaw Advisors.
“The last two weeks we have seen the short positions re-established first thing Monday morning, thereby pushing the price lower at the start of the week. We await Monday’s opening salvos. Any recovery in carbon price is now a remarkable event so a further rise on Monday will provide a good indication that the rout is over for now. It will likely also lead to an upward correction of some description.”
Meanwhile, German power prices rose by around 1%, but their positive effect on utility profit margins was more than offset by firmer coal prices, a weaker euro, and climbing carbon.
Below are this past week’s EUA auction results, featuring the clearing price, distance to secondary spot market price on ICE at the time the bidding window closed, 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||1,923%||(based on 38% efficiency factor)|
|(does not include transaction costs)|
By Mike Szabo and Ben Garside – firstname.lastname@example.org