EU carbon prices surged to a three-month high in volatile trade on Tuesday, with traders attributing the gains to speculative short-covering and utility buying amid large gains in the wider energy complex.
Front-year EU Allowance futures trading on ICE ended up 75 cents or nearly 13% at €6.65, just shy of the day’s €6.71 peak, which was touched earlier in the afternoon on what appeared to be a brief but sharp spike in buying caused by triggered stop-losses.
The day’s rise was the largest in more than three years.
Volume on the bellwether contract was heavy at 43.7 million, with a further 7.3 million units changing hands along the rest of ICE’s EUA futures curve.
Prices initially dipped at the open to their intraday low of €5.87, but then marched higher throughout the morning before surging around midday in London after the futures breached a technical resistance level around €6.23-6.25.
“The gains were fuelled by a mixture of rocketing power prices … and stop losses triggered after short speculators that gambled on a fall after yesterday’s closing losses had to turn their positions around,” said Redshaw Advisors.
Analysts on Monday warned that EUAs might come under pressure this week from traders tempted to take profits following last week’s near 9% gains.
German power gained more than €1/MWh across the board on Tuesday to hit their highest since early January, with the calendar-year contracts nearing break-even levels around €26/MWh identified by analysts.
The front-year contract settled at €25.76/MWh on EEX, up some 24% from its 2016 closing nadir of €20.85 on Feb. 16.
Meanwhile, European coal posted gains in excess of $1/tonne to levels not seen since last November.
Cargoes for delivery in Rotterdam next year settled on ICE at $46.96/tonne, up some $10 from their February lows. The futures curve also flattened, with the front-year contract nearing contango – something not seen since last October.
These factors combined to push the German clean dark spreads up to two-month highs.
The Dec-16 EUAs slipped back down to €6.21 just after 1430 GMT, but gains in Brent crude, which is up by around $8 or 21% in the past three weeks, provided fuel for a late afternoon rally that helped carbon end near its session peak.
“Utility buying interest puts them firmly in the driving seat as to where carbon goes next,” Redshaw said. “Speculators will be wary of opening short positions for fear of getting burnt in further large moves, so much will depend on how power prices behave in the short term to determine where the top for carbon is.”
Several market participants debunked media reports that Tuesday’s EUA price rise was linked to French President Francois Hollande announcing on Monday that his country would unilaterally adopt a price floor for carbon allowances.
The French Environment Ministry on Tuesday confirmed that the country will introduce a domestic EUA floor price for power generators from Jan. 2017.
Despite still being down around 20% since December, EU carbon prices are up nearly 40% since the start of the latest rally, which kicked off at the end of March.
But in that time, open interest on the benchmark ICE Dec-16 contract has fallen by around 19 million or 3.4% to 539.8 million tonnes, suggesting that traders covering bearish bets on the most liquid EUA contract accounted for a large portion of the recent gains.
“A big fall in open interest, with prices going up, suggests short-covering,” said Trevor Sikorski, an analyst with London-based Energy Aspects.
Meanwhile, open interest on the later-dated March and December futures for delivery on ICE between 2017 and 2019 – contracts most likely to be bought by Europe’s big utilities to hedge their forward power sales – has risen by more than 30 million or 7.6% to 434.2 million over the same timeframe.
Observers earlier this year noted that some utilities had delayed the restart of their hedging activities following the Christmas break due to collapsing power prices and rock-bottom clean dark spreads.
But two traders suggested that improving dark spreads had attracted utilities back to the market, and that they were supporting the recovery in EU carbon prices.
Last-minute EUA buying may have also played a role in Tuesday’s rise, as the deadline to surrender carbon units for 2015 EU ETS compliance is effectively this Friday because the actual Apr. 30 deadline falls on a Saturday.
Carbon’s upward trajectory was little changed by Tuesday morning’s EU auction, despite its fairly weak indicators. The sale cleared four cents below the secondary market at €6.08, with below-average bid coverage of 1.91.
By Mike Szabo and Ben Garside – firstname.lastname@example.org