(Updates with end of day figures)
European carbon allowances tumbled on Friday amid scarce buying interest and after breaking through a key technical level that had supported prices since mid-September.
Front-year EU Allowances trading on ICE settled 29 cents or 3.5% lower at €8.09, after hitting a 10-week low of €7.93 moments earlier in the day.
The futures have fallen in five of the past six sessions, posting a week/week decline of 5.3%.
Volume on the contract was strong at 24.8 million units traded on Friday, but smaller than the 28.8 million that changed hands on the Dec-16s, which will take over as the benchmark contract once the Dec-15s expire on Dec. 14.
A total 59.2 million EUAs were transacted on all ICE contracts.
“We broke below the technical support around €8.28 and then everyone pulled their bids at the same time and prices went into freefall. It was very weird,” one trader said.
“I think the market may have been excessively long in anticipation of auction supply cutting off next week. Last year it helped to boost prices in the days before Christmas,” another trader said.
Germany sold 3.182 million spot EUAs for €7.98 each on Friday, in its last auction of 2015.
The sale cleared a massive 9 cents below market, and attracted bids from 18 participants equivalent to a total 8.13 million allowances.
A group of 25 EU member states will next week offload a final 8.65 million units across three auctions before new supply flows take a break until the new year.
A third trader said Friday’s drop was also “likely to do with position rolls”, as participants shift their holdings from the Dec-15s to contracts with later expiry such as the Mar-16s and Dec-16s.
EUA spread trades made up at least 33.5 million of Friday’s turnover.
“There’s little reason to be buying the Dec-15s at the moment, as buyers can pick up the Mar-16s for next year compliance, which are more liquid than they used to be,” the second trader said.
Some major European utilities have switched to buying the March-expiry futures for their compliance, which has boosted liquidity and open interest in the contracts.
Analysts have identified the next technical support level for the Dec-15 EUAs at €7.85-7.87, with €7.77 providing a strong foundation below that.
Friday’s EUA fall rippled into the power market, with German baseload prices shedding more than 1% on EEX.
European coal prices were also lower, with the Cal-17 futures leading the drop on ICE, losing 96 cents to $42.90/tonne.
Coupled with a stronger euro, this caused German clean dark spreads to rise to levels not seen in months. The Cal-2016s ended the week at an eight-month high, the 17s at a three-month high, and the 18s at a five-week high.
Meanwhile, CERs were also not spared, with front-year futures dropping 4 cents to settle at €0.52 – also a 10-week low.
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:
| 07/12/2015 | EU | 2,918,000 | €8.42 | -0.03 | 3.13 |
| 08/12/2015 | EU | 2,198,000 | €8.33 | -0.05 | 2.07 |
| 09/12/2015 | UK | 3,123,000 | €8.35 | +0.02 | 2.15 |
| 10/12/2015 | EU | 2,198,000 | €8.32 | -0.01 | 3.47 |
| 11/12/2015 | DE | 3,181,500 | €7.98 | -0.09 | 2.56 |
And next week’s scheduled sales:
| 14/12/2015 | EU | 2,198,000 |
| 15/12/2015 | EU | 2,198,000 |
| 16/12/2015 | EU | 2,818,500 |
| 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% | 0.846% | 1.036% | 1.256% | 2016 | €4.92/MWh | +0.26 | |
| Dec-15 | 0.867% | 1.048% | 1.260% | 2017 | €3.76/MWh | +0.53 | ||
| Dec-16 | 1.229% | 1.468% | 2018 | €2.99/MWh | +0.64 | |||
| Dec-17 | 1.699% | (based on 36% efficiency factor) | ||||||
| (does not include transaction costs) | ||||||||
By Mike Szabo – mike@carbon-pulse.com
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