EU Market: Carbon ends flat as tighter auction outlook holds prices near year-high

Published 23:06 on November 27, 2015  /  Last updated at 23:17 on November 27, 2015  /  EMEA, EU ETS  /  No Comments

EU carbon prices ended flat on Friday to notch a 7-cent weekly gain as traders took encouragement from a pick-up in auction demand ahead of curtailed December supply.

EU carbon prices ended flat on Friday to notch a 7-cent weekly gain as traders took encouragement from a pick-up in auction demand ahead of curtailed December supply.

The benchmark Dec-15 EUA contract ended unchanged at €8.58 on ICE after trading in a tight €8.54-8.60 range on thin turnover of 7.5 million.

That was well within the week’s €8.47-8.67 range, the top of which was a one-month high reached on both Wednesday and Thursday, and within reach of the year’s peak of €8.71.

The week’s close puts prices almost on a par with the €8.60 year-end value predicted on average by ten analysts in an October Carbon Pulse poll, but some traders expect further gains due to strong year-end auction demand coupled with tighter supply in December.

Auction volume drops to 11.9 million next week, down from this week’s 15.08 million, due to the absence of the UK’s fortnightly sale. It then climbs back to 15.06 million before closing out the year on the week starting Dec. 14 with 8.65 million.

Friday’s sale by Germany attracted bid coverage of 3.20, one of three sales this week to record higher than the year’s 3.08 average bid-to-cover ratios.

The signal from the energy complex was also little changed on Friday, though it diverged over the course of the week.

The Calendar 2016 German clean dark spreads rose around 4% for the week, while the 2017 and 2018 vintages fell by around 9% and 13% respectively to slip back towards the multi-month lows reached in mid-November, giving a weak incentive for utilities to sell electricity forwards and buy the corresponding carbon.

PARIS PRAGMATIC

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

Market watchers 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 seal the survival of the CDM as a global pricing instrument to boost CER prices.

The less liquid Dec-15 CER contract slipped 1 cent to €0.59 on Friday, while the Dec-16s ended at €0.54, also 1 cent lower.

The Dec-15-16 backwardated spread has narrowed to 5 cents from around 10 cents earlier this month amid a flurry of arbitrage trades.

Separately, the European Commission published the 2016 auction calendars late on Friday.

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:

23/11/2015 EU 2,918,000 €8.46 -0.05 2.34
24/10/2015 EU 2,198,000 €8.63 +0.02 3.74
25/10/2015 UK 3,123,000 €8.56 -0.05 2.01
26/10/2015 EU 2,198,000 €8.61 0.00 3.28
27/10/2015 DE 3,198,000 €8.54 -0.02 3.20

And next week’s scheduled sales:

30/11/2015 EU 2,198,000
01/12/2015 EU 2,198,000
03/12/2015 EU 2,198,000
04/12/2015 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% 0.767% 0.957% 1.130% 2016 €4.06/MWh +0.15
Dec-15 0.816% 0.986% 1.148% 2017 €2.75/MWh -0.28
Dec-16 1.156% 1.324% 2018 €2.01/MWh -0.31
Dec-17 1.486% (based on 36% efficiency factor)
(does not include transaction costs)

 

By Ben Garside – ben@carbon-pulse.com

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