EU Market: EUAs notch 1.4% weekly rise as bulls conquer high auction supply

Published 22:05 on November 20, 2015  /  Last updated at 10:59 on November 23, 2015  /  EMEA, EU ETS  /  No Comments

EU carbon prices slipped on Friday but still posted a marginal weekly gain, as traders drew encouragement from consistent appetite for units despite high auction supply.

EU carbon prices slipped on Friday but still posted a marginal weekly gain, as traders drew encouragement from consistent appetite for units despite high auction supply.

The benchmark Dec-15 EUA fell 12 cents in the week’s final session to settle at €8.51 on ICE, near the bottom of the day’s €8.50-8.63 trading range on moderate volume of 11 million units.

The front-year EUA futures built steadily over the week to hit a two-week peak of €8.64 on Wednesday and Thursday, with today’s loss halving an overall weekly rise from last week’s €8.39 settle.

Strong gains on Monday and Tuesday remained intact, with Dec-15 prices ending just a cent below the contract’s middle Bollinger band, which doubles as its 20-day moving average.

Monday’s 14-cent gain set a bullish tone, with speculators encouraged when a government auction cleared above market for the first time since Oct. 27.

The rest of the week’s auctions were less favourable, but traders were encouraged that prices held their ground despite the persistently high levels of supply.

Today, Germany sold 3.2 million spot EUAs at €8.59, one cent below market, with bid coverage of 2.47, the lowest this week. Only Thursday’s auction with coverage of 3.26 was above the year’s 3.1 average.

Auction supply remains high next week with 15.08 million units scheduled for sale, up from 14.81 million this week, as the UK’s fortnightly auction replaces this past week’s Polish sale.

SPREADS RECOVER, REMAIN NARROW

The drop in carbon contributed to a rise in German clean dark spreads on Friday, along with plunging dollar-denominated coal prices. Both were only partially offset by a weaker euro and lower German baseload power prices.

The spreads have recovered from a mid-week nadir, but the 2017 and 2018 levels remain within sight of seven-month lows, damping any incentive for utilities to sell electricity forward and buy the corresponding carbon.

PARIS LOOMS

Next week is the last before thousands of negotiators head to Paris for crunch two-week UN talks to seal a global climate pact.

Analysts expect no direct impact on EUA prices as the deal is not expected to trigger any deepening of the EU’s 2030 emission target, though the meeting could help guarantee the survival of the CDM as a global pricing instrument.

Dec-15 CERs posted a 1 cent gain for the week, settling at €0.66 but easing back from Wednesday’s two-year high of €0.68.

The normally thinly-traded UN units saw a flurry of activity along the futures curve, with 462,000 changing hands on Friday.

A block trade of 650,000 credits was done on the Dec-16 contract on Wednesday, a day after what appeared to be a spot-Dec16 spread play of 509,000 units to likely take advantage of the steeply backwardated front-end of the curve.

This week saw the deadline pass for Annex I countries to transfer enough carbon units to cover their 2008-2012 emissions under the Kyoto Protocol, potentially locking up any CER or ERU credits that have not been transferred to accounts in the CDM registry or the UK, which is one of the only countries to allow a limited amount to be carried over to Kyoto’s second commitment period.

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:

16/11/2015 EU 2,918,000 €8.43 +0.01 2.94
17/10/2015 EU 2,198,000 €8.49 -0.01 2.73
18/10/2015 UK 839,000 EUAAs €8.35 -0.19 4.55
18/10/2015 PL 2,855,500 €8.51 0.00 2.81
19/10/2015 EU 2,198,000 €8.57 -0.01 3.26
20/10/2015 DE 3,198,000 €8.59 -0.01 2.47

And next week’s scheduled sales:

23/11/2015 EU 2,198,000
24/11/2015 EU 2,198,000
25/11/2015 UK 3,123,000
26/11/2015 EU 2,198,000
27/11/2015 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% 0.760% 1.012% 1.170% 2016 €3.91/MWh -0.02
Dec-15 0.823% 1.052% 1.195% 2017 €3.03/MWh +0.30
Dec-16 1.282% 1.393% 2018 €2.32/MWh -0.01
Dec-17 1.496% (based on 36% efficiency factor)
(does not include transaction costs)

By Ben Garside – ben@carbon-pulse.com

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