EU Market: Carbon prices crash through €7 to post another 10% weekly drop, enter bear market

Published 09:12 on January 15, 2016  /  Last updated at 20:48 on January 22, 2016  /  EMEA, EU ETS  /  No Comments

EU carbon hit a 10-month low on Friday to continue the rocky start to 2016, which has wiped out almost 20% of EUA prices since the end of 2015.

EU carbon hit a 10-month low on Friday to continue the rocky start to 2016, which has wiped almost 20% off EUA prices since the end of 2015.

The Dec-16 EUA contract trading on ICE settled down 41 cents or 5.8% at €6.72, just off the intraday bottom of €6.68 – the lowest price seen since Mar. 17, 2015.

Turnover on the benchmark futures was heavy at almost 26 million units traded.

On a weekly basis, the front-year futures posted a 9.9% drop for a second straight week.

German bourse EEX earlier on Friday warned participants that it was experiencing a rare “fast market” situation in its spot EUA trading, meaning it was witnessing high price fluctuations within a short period of time.

Germany’s first EUA auction of 2016 did little to support prices, despite relatively strong demand in the sale.

The country sold 3.495 million spot EUAs at €6.71 each – clearing 2 cents above the secondary market and attracting bid coverage of 3.06, above the 2.26 average recorded in the first four auctions of the year.

Prices are now down some 23% from their 2015 high of €8.78.  An financial instrument that falls more than 20% from its peak is by definition considered to have entered bear market territory.

The contract’s Relative Strength Index plunged into the teens, far below the 30-mark that indicates something is oversold.

PERIPHERAL MARKETS

Carbon prices have sold off along with the rest of the energy complex to start the year, including German power, European coal, and crude oil – all of which have plumbed either record lows or the lowest levels in more than a decade.

German baseload power prices shed a further 2% across the board, while cal-17 Rotterdam coal on ICE lost 76 cents or 2% to as low as $37.70/tonne.

Both Brent and WTI crude oil prices fell to touch new lows under $30/barrel, as traders prepared for the possible lifting of international trade sanctions against Iran, which would open the door to even more oil supply in an already flooded market.

Equity markets also took a battering as global growth fears heightened.

WHY SO DOWN?

Many EU ETS participants suspect that speculative short-selling has been responsible for the bulk of the decline in EUAs as utilities remain on the sidelines, though some have suggested that a few large industrials under pressure from falling commodity prices and wider macroeconomic concerns were monetising allowances.

“Evidence is mounting of industrials raising cash,” London-based traders Redshaw Advisors said in a tweet.

Most trading volumes this week have been centred on the front-end of the EUA futures curve, which tends to be far more liquid than the further dated contracts.

Implied annual yields on the EUA carry trade involving futures towards the back end of the futures curve rose markedly over the past two weeks, supporting the view that selling pressure was focussed on the front end.

For example, the annualised return for simultaneously buying the Dec-16s and selling the 19s climbed to 1.95% on Friday, up from 1.63% at the end of 2015. (See below for more yields)

Including today’s fall, the bellwether Dec-16 EUA contract has posted losses in nine of the 10 trading days so far this year, with Wednesday’s minor gains viewed by some participants as a “dead cat bounce” rather than the start of a rebound.

Below are this past week’s EUA auction results, featuring the clearing price, distance to spot price on ICE at the time the sales ended, and bid-to-cover ratio:

11/01/2016 EU 3,425,000 €7.45 -0.07 1.83
12/01/2016 EU 3,425,000 €7.04 +0.04 3.35
13/01/2016 UK 3,489,500 €7.26 -0.04 1.38
14/01/2016 EU 3,425,000 €7.05 -0.02 2.47
15/01/2016 DE 3,495,000 €6.71 +0.02 3.06

 

And next week’s scheduled EUA sales:

18/01/2016 EU 3,425,000
19/01/2016 EU 3,425,000
20/01/2016 EU 683,500 EUAAs
21/01/2016 EU 3,425,000
22/01/2016 DE 3,495,000

 

Implied EUA carry trade annual returns German clean dark spreads
Dec-16 Dec-17 Dec-18 Dec-19 Cal Yr Price Wk chg
Spot 0.807% 1.084% 1.417% 1.679% 2017 €3.97/MWh +0.05
Dec-16 1.339% 1.697% 1.951% 2018 €3.12/MWh -0.19
Dec-17 2.056% 2.257% 2019 €3.12/MWh -0.16
Dec-18 2.446% (based on 36% efficiency factor)
(does not include transaction costs)

 

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

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