EU carbon dipped to its lowest for three weeks on Monday as weaker power weighed and analysts warned that EUA prices could face additional pressure.
The benchmark Dec-15 EUA futures settled down 9 cents at €8.32 on ICE on moderate turnover of 9.7 million, near the bottom of the day’s €8.31-8.39 range.
Today’s drop had already come off the back of a 2.5% weekly loss last week, creating bearish momentum that analysts said could lead to further declines.
“The carbon price seems poised for an additional drop this week due to a bearish technical picture, which could encourage speculative traders to put further selling pressure on the market,” analysts at Thomson Reuters said in a weekly note.
“However, we do not rule out a bullish reversal driven by short covering later in the week as the price hits technical support levels,” they added.
Bernadett Papp, analyst at brokers Vertis, identified the first support level at €8.30, the confluence of several technical indicators.
“Below these levels a Fibonacci level at €8.19 and local lows near €8.07 could halt the depreciation,” she added.
Year-ahead German baseload power prices added to the bearish outlook on Monday, falling 1.3% on EEX to €28.90/MWh.
Weaker coal prices and a slightly stronger euro were not enough to offset their bearish impact on German clean dark spreads.
This meant the calendar 2017 and 2018 spreads – which lost 14% and 20% respectively lasts week – fell by 5% and 6% on Monday.
They are now at their lowest levels in at least three months, further denting the incentive for European utilities to sell electricity forwards and buy the corresponding carbon.
EU nations auctioned 2.9 million spot EUAs in a sale that cleared at market and was over four times oversubscribed, the highest for two weeks and above the year’s average of 3.1 for bid coverage.
There were 19 bidders, 12 of which were successful, according to a spokesman for auction hosts EEX, which experienced technical difficulties reporting full auction results. He added that the exchange hopes to resume its regular reports tomorrow.
EUA auction supply this week rises to 15.08 million allowances this week, up from 11.95 million last week.
“With prices having failed to consolidate or advance last week when the auctions were 3 million tonnes lower, all things being equal there should be more of the same to come,” said traders Redshaw Advisors in a note to clients.
“The mild and windy weather is set to continue during November (strongest El Nino ever recorded is having this knock-on impact),” they added, referring to conditions that would lower electricity demand and add additional bearish pressure.
On Thursday, an advisor to the European Court of Justice will give an opinion on a case into the legality of the EU’s Cross Sectoral Correction Factor.
The case, brought by big emitters including Borealis, Dow Chemical and Esso against the European Commission, “might increase the volatility in the carbon,” according to Vertis’ Papp.
The CSCF cuts the free allocation of EUAs to industry across the board. Should the court rule its application illegal, it would result in a topping up of the allocation by a consequent reduction from the EUA pot due to be auctioned.
This could have a slightly bullish overall market effect as freely allocated units tend to be hoarded by industry, rather than sold, in anticipation of higher prices later this decade.
Court opinions are generally followed in the full verdict, which is likely to take several more months.
By Ben Garside – email@example.com