EU carbon sank below €6 on Tuesday as lower energy prices and a weak auction triggered a sell-off to unwind all of last week’s rapid gains.

The Dec-16 EUA futures settled down 12 cents at €5.99, near the middle of the session’s €5.83-6.15 range, on fairly heavy turnover of 22.5 million.

That puts the benchmark carbon contract only slightly above the previous Wednesday’s settlement of €5.90, which was followed by two days of massive gains that pushed the Dec-16s to a three-month high of €7.07.

“We do have strong support around €5.81-86 so this could be classed as a bit of a ‘last chance saloon’ level; a level that needs to hold or we’ll be signalled to head back down to the lows,” said Clive Lambert of technical analysts FuturesTechs

“This drop somehow makes sense … Carbon jumped way too much with no strong fundamentals behind it [last week].  It makes me thing that traders are extremely nervous and we might see other jumps or drops like the one we saw last week,” added a trader.

Carbon dropped from the first minute of Tuesday’s trade as the previous session’s big drop in power prices cut the incentive for utilities to buy.

EUAs then fell further after the EU auction cleared at its biggest discount to the market since early April.

The auction for 3.425 million spot EUAs cleared at €5.88, eight cents below the secondary market, with below-average bid coverage of 1.82.

The last above-average coverage was over a week ago on Apr. 25.

German clean dark spreads clawed back some of Monday’s loss as power prices fell far less than coal, but still remained well below last week’s close.

Oil prices fell as much as 3% for a second straight day, retreating swiftly from the year’s highs hit last week on renewed supply worries.

With last week’s EUA gains now wiped out, some market watchers said they expect a calmer period before EUAs resume a steady climb for the rest of the year.

“It seems fundamentals are being restored to their rightful position. Expect a few more tremors of volatility after such an exciting week and, subject to the usual factors, a small, slow rise into year-end as the fundamental shortage of EUAs in this last year of Backloading takes its toll,” said Redshaw Advisors in a weekly note to clients.

By Ben Garside – ben@carbon-pulse.com