EU Market: Carbon sinks to 3-mth low as analysts flag bearish start to year

Published 21:47 on January 4, 2016  /  Last updated at 22:22 on January 4, 2016  /  EMEA, EU ETS  /  No Comments

EU carbon fell 2.1% on Monday to its lowest settlement since Sep. 29 as power prices dropped and analysts predicted prices would come under pressure despite a lack of auction supply.

EU carbon fell 2.1% on Monday to its lowest settlement since Sep. 29 as power prices dropped and analysts predicted prices would come under pressure despite a lack of auction supply.

The benchmark Dec-16 EUA contract settled down 18 cents on ICE at €8.11, a cent off the session floor, on what was the first trading day of 2016.

Turnover was modest at just 6.7 million, with just 1.4 million changing hands on all other vintages, which could be an indicator that trade was dominated by speculators rather than utilities that tend to deal further along the curve.

Carbon dropped as next-year German power prices sank 31 cents on EEX to end at €26.30/MWh, near record lows amid forecasts of warmer weather that could dampen prompt demand.

This came as a 7% drop in Chinese shares dragged down stock markets around the world, as investors began 2016 with fresh worries over global growth and sought the safety of assets such as bonds and gold.

Analysts at Thomson Reuters said they expect carbon to come under pressure this week due to technical indicators, wider financial markets and possibly Poland’s announcement last week that it would challenge the MSR through the courts.

“That said, a potential rebound in power forward prices given the vicinity of the €26.2/MWh all-time low and the pause in EUA auction supply until next week could limit the downside for carbon prices,” they added in a weekly note.

Traders Redshaw Advisors agreed that Poland’s announcement could be viewed bearishly, but doubted the news would have much impact as they said the market isn’t currently pricing in the MSR, which is due to start in 2019.  They added that any clarity on the issue is unlikely in the near term.

AUCTION DROUGHT

No fresh EUA supply will come to market before government auctions resume on Jan. 11, when a full week of sales will offer up 17.3 million spot EUAs.

The supply gap amounts to just over three weeks as the final auction of 2015 was held on Dec. 17.

EU states will auction 733.7 million EUAs this year, up 16% or around 100 million on 2015 levels as Backloading winds down in its third and final year. Weekly auction volume will on average be around 2 million EUAs higher than in 2015.

HOLIDAY TRADING

ICE offered trade in the Dec. 28-31 week between Christmas and New Year.

Front-year EUA futures were thinly traded over the period, moving in a narrow €8.27-8.40 range and gaining 3 cents week-on-week.

That €8.40 peak was the highest since Dec. 11, the day the contract briefly plunged below €8 as the buy side dried up amid speculation of a late year rally.

STELLAR 2015, BULLISH LONGER TERM

Benchmark EU carbon allowances rose 11% over 2015, making it one of the world’s best performing commodities in a poor year for the asset class, as Backloading supply curbs bit and lawmakers agreed further supply restrictions via the MSR.

The Thomson Reuters CRB commodities index dropped 24% over the year to six-year lows and Brent crude oil fell 36% as China’s economic slowdown took effect amid excess global supply.

“We expect the long term increasing trend [for EUAs] to continue in 2016 as well,” said Bernadett Papp of brokers Vertis in a weekly blog post.

By Ben Garside – ben@carbon-pulse.com

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