EU carbon climbed end at a fresh three-year high on Friday after Germany’s auction cleared above market and attracted the highest bid coverage for six months.
The benchmark Dec-15 EUA futures settled at the peak of €8.63, up 15 cents on Thursday’s settlement.
Volume was healthy on the front-year futures with 13.9 million units changing hands.
With just 3 million units traded on the Dec-16 EUAs, the upwards move was likely spurred by speculators rather than utilities, which tend to buy further down the futures curve.
However, volume on the further out futures picked up as the day went on, with a total 9.4 million units changing hands on the contracts for expiry between 2016 and 2018.
Germany’s sale of 3.2 million spot EUAs cleared at €8.52 on EEX, two cents above prompt prices in the secondary market and a cent above the Dec-15s when the bidding window closed at 0900 GMT.
The auction had a bid-to-cover ratio of 4.56, the highest since May 7 and well above October’s average of 3.28. Thursday’s bid coverage was also strong at 4.26, possibly indicating more demand for the carbon units.
Friday’s peak extends the previous three-year high of €8.54 hit on Wednesday, and comes as speculators have grown more confident about placing bullish bets with carbon consolidating at current elevated levels.
BEARISH ENERGY COMPLEX
Friday’s rise caps a 2.9% or 24-cent weekly gain for the front-year EUA futures despite bearish signals from the energy complex.
Thursday’s ECB meeting sent the euro tumbling as ECB President Mario Draghi said the bank’s board had discussed further cuts and quantitative easing to counter weak euro zone inflation.
This made coal imports more expensive for continental EU utilities and hit German clean dark spreads, denting utility profitability and their incentive to sell power forward and buy the corresponding amount of carbon to lock-in profit.
The spreads narrowed further on Friday as the euro weakened further to hit a two-month low, while German power remained flat.
Calendar 2016, 2017 and 2018 German clean dark spreads fell by around 10% week-on-week and were at their lowest for around two weeks.
WEEK AHEAD
With the addition of the UK’s fortnightly auction, next week government sale volume will rise to 15.1 million from this week’s 11.9 million.
Member states may give their initial reactions to the post-2020 ETS reform proposal at Monday’s Environment Council in Luxembourg. A webstreamed session is scheduled to take place for almost two hours from 0910 GMT.
Sunday’s general election in Poland looks set to be won by the poll-leading and pro-coal PiS party, which holds an even stronger opposition to ambitious EU climate policy than the incumbent Civic Platform. See our analysis here.
KEY DATA
Below are this past week’s EUA auction results, featuring the clearing price, distance to front-year EUA futures in the secondary market, and bid-to-cover ratio:
| 19/10/2015 | EU | 2,918,000 | €8.35 | -0.04 | 3.80 |
| 20/10/2015 | EU | 2,198,000 | €8.32 | -0.02 | 3.15 |
| 22/10/2015 | EU | 2,198,000 | €8.44 | 0.00 | 4.26 |
| 23/10/2015 | DE | 3,198,000 | €8.52 | +0.01 | 4.58 |
And next week’s scheduled sales:
| 26/10/2015 | EU | 2,198,000 |
| 27/10/2015 | EU | 2,198,000 |
| 28/10/2015 | UK | 3,123,000 |
| 29/10/2015 | EU | 2,198,000 |
| 30/10/2015 | DE | 3,198,000 |
| Implied EUA carry trade annual returns | German clean dark spreads | |||||||
| Dec-15 | Dec-16 | Dec-17 | Dec-18 | Cal Yr | Price | Wk chg | ||
| Spot | 0.817% | 0.800% | 1.016% | 1.127% | 2016 | €4.08/MWh | -0.42 | |
| Dec-15 | 0.811% | 1.037% | 1.141% | 2017 | €3.34/MWh | -0.29 | ||
| Dec-16 | 1.264% | 1.317% | 2018 | €3.03/MWh | -0.30 | |||
| Dec-17 | 1.362% | (based on 36% efficiency factor) | ||||||
| (does not include transaction costs) | ||||||||
By Ben Garside – ben@carbon-pulse.com
