European carbon prices reversed course after sinking to an 11-week low on Monday, finishing unchanged as speculators and utilities sought bargains as the benchmark EUA futures contract expired.
The Dec-15s trading on ICE settled at €8.07 on volume of 23.5 million units, in the contract’s final day before deliveries take place.
From Tuesday, the Dec-16s become the new bellwether contract. They ended toady up a cent at €8.15 on turnover of 30.3 million.
Much of Tuesday’s high volume was linked to position rolling.
The Dec-15s began sliding in the morning, touching an intraday bottom of €7.90 before starting to climb back in the afternoon.
“It was a massive reversal and the waters are still choppy, but everyone was looking for a bottom,” one trader said.
“Some were fairly eager to buy, especially if they lost money on the way down, and those that were short began to cover their positions.”
Prices dropped by as much as 9% over the past six sessions on weak auction demand and unwinding of long positions by speculators, after the Dec-15s failed to scale new heights beyond the €8.65-8.67 range following numerous attempts in the last three weeks.
“We don’t yet know if the weak longs are all flushed out, therefore calling the next price move is difficult,” said Redshaw Advisors in a note to clients.
The fall, exacerbated by automatic stop-loss orders, raised technical flags, knocking prices to close below their 100-day moving average for the first time since April, and pushing the contract’s Relative Strength Index (RSI) below the ‘oversold’ 30 level.
“Most people are still bullish so they were looking for a good entry point, and high clean dark spreads added to that support,” another trader said.
The German clean darks retreated on Monday mainly due to a drop in baseload power prices, which shed as much as 1% on EEX. However, the spreads remain at elevated levels, providing additional incentive for buyers.
“The fundamentals say we should be higher but speculation has caused the price to drop considerably. If there is more volume yet to be flushed out of the long-side speculators then, coupled with weak demand at the remaining auctions, the price will fall further. Counteracting this, the clean dark spreads are getting stronger with every EUA price fall and utility demand will increase as well as some additional industrial compliance buying as companies look to true-up year-end requirements and take advantage of the price falls,” Redshaw Advisors said.
“We expect to see some upward correction in EUA prices this week … Favourable clean dark spreads and the prospect of lower auction volumes next week could provide some support, [but] further weakness in power and fuel prices might potentially weigh on carbon,” said analysts at Thomson Reuters Point Carbon.
The EU will hold three auctions this week for a total 8.65 million allowances, marking the final sales of the year.
“With this in mind, if you are short then take advantage of the discount as the lack of auctions will make it harder to buy until Jan. 11, and if you are long keep an eye on those other speculators,” Redshaw added.
Prices did not appear to react to Monday’s weak auction result, which saw 2.918 million spot allowances sold for €7.92 each.
It cleared 5 cents below market and attracted interest from 19 participants totalling 5.78 million units – the fewest for an EU auction since late August and equivalent to an oversubscription rate of 1.98.
Most market participants said the new global climate change agreement clinched in Paris over the weekend would have little immediate bearing on the market.
By Mike Szabo – mike@carbon-pulse.com
