EU Market: EUA sell-off continues as more stops triggered, utilities stay on sidelines

Published 15:30 on January 7, 2016  /  Last updated at 17:50 on January 11, 2016  /  EMEA, EU ETS  /  No Comments

European carbon prices continued to sell off on Thursday, plumbing lows below €7.50 not seen since Feb. 2015, as traders said more speculative selling triggered stop-losses while utility buyers remained on the sidelines.

(Corrects date in lede to Jun. 2015 from Feb.)

European carbon prices continued to sell off on Thursday, plumbing lows below €7.50 not seen since Jun. 2015, as traders said more speculative selling triggered stop-losses while utility buyers remained on the sidelines.

The Dec-16 EUA futures trading on ICE tumbled to an 11-month low of €7.40 around 1415 GMT, a daily drop of 41 cents or 5.2%, before climbing back to close at €7.60.

Volume on the benchmark contract was heavy at 26.4 million units changing hands, with a further 6.3 million bought and sold along the rest of the EUA futures curve.

“It looks mainly speculator driven … They’ve been too long.  Some big stop-losses have been triggered, and there’s huge buying on the EUA put options, and this is being met with a lack of buying interest from utilities due to low spreads,” one trader said.

German clean dark spreads, the profit margins for coal-fired utilities in the top EU economy and emitter, have slipped due to falling power prices.

Market participants have suggested that some major utilities may not have started hedging their future output again following the holiday period, while others may be waiting for daily government EUA auctions to resume next week.

At Wednesday’s intraday bottom, the front-year contract was down nearly 90 cents from its 2015 close of €8.29.

“An 11% drop in four days with no strong fundamentals behind [the selling] … It is weird,” a second trader said.

“People are trying to push the [carbon] price lower today, trying to hit some stops.  I don’t think there’s a single player with enough VaR (value at risk) to build a [short] position this big,” a third trader said.

He added that some utilities that had hedged their winter 2016 power several years ago could be unwinding positions in expectation of Europe’s unseasonable warm weather to continue, thereby cutting demand.

But a fourth trader was confident that this week’s decline was mainly fuelled by speculative position closing.

“It’s certainly not coming from one or two small prop shops.  Carbon has been outperforming in the past, so maybe it’s finally catching up with rest of the energy complex,” he added, referring to record low European power prices, DES ARA coal and Brent crude oil prices that are at their lowest in more than a decade.

“EUAs ran up from €5 to almost €9 in less than two years, so I think we were due a major correction.”

A few market participants noted that the EUAs’ technical indicators were pointing to a massively oversold market.

The Dec-16’s RSI at one point was below the 20-mark – the lowest level seen since 2011, according to ICE data.

“This price is attractive to compliance companies, [and] we’ve had a lot of buy orders today,” a broker added.

By Mike Szabo and Ben Garside – mike@carbon-pulse.com

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