EU carbon prices turned upwards on Wednesday following seven straight days of losses, but traders remained cautious about the market’s prospects of a rapid recovery.

The Dec-16 EUA futures settled 14 cents higher at €7.29 on ICE, near the middle of the day’s €7.16-7.38 range, on heavy volume of 22.8 million.

The move lifts carbon further from the nine-month low of €7.01 touched Tuesday, but traders said the market remained volatile in the wake of the 15% price loss notched to start of the year.

“The market is still looking for direction.  We were flat yesterday and higher today, but it doesn’t feel like a rebound yet,” said one trader.

Market participants said EUAs remain vulnerable to short-selling – either to more bearish bets pushing it below €7 or to an upward price surge from speculators rushing to cover their positions.

Open interest on the ICE Dec-16 futures crept up by 173,000 units on Tuesday, approaching 560 million tonnes after rising by 5 million over the previous six days as prices plummeted – suggesting a build-up of short positions.

The front-year futures gained ground in thin trade early Wednesday to claw back more of the €1.28 peak-to-trough rout since Dec. 31, 2015, but prices slipped after a weak UK auction.

The sale of 3.49 million spot EUAs cleared at €7.26 – some 4 cents below market – and attracted bid coverage of just 1.38, the lowest of the year’s three sales so far and well below the UK’s average rate of around 2.3 recorded in 2015.

German clean dark spreads narrowed slightly but remained higher than a week earlier, as European coal prices nudged higher to add pressure along with carbon, and while rock-bottom German baseload power prices were little changed.

By Ben Garside – ben@carbon-pulse.com