(Updates throughout with new comments, market close)

The EU carbon rout continued on Wednesday as prices fell by more than 8% to a 15-month low, wiping out the small gains posted over the last two sessions as selling by speculators and industrials picked up amid ongoing concerns over the global economy and weakness in energy and equity markets worldwide.

The Dec-16 EUA futures settled on ICE down 50 cents at €6.36 after sliding to as low as €6.29, the lowest level seen since Oct. 20, 2014 and a clear €2 below end-2015 prices.

The benchmark contract sold off at the opening bell, shedding as much as 15 cents in the first five minutes before drifting lower throughout the morning.

“Someone smashed up the market first thing this morning when liquidity was thin,” one trader said.

Selling then precipitated in the afternoon after US markets opened, with the front-year contract bursting below the €6.50 and €6.36 technical support levels identified by some analysts.

Some 30 million units changed hands on ICE’s Dec-16 futures, with a further 9 million in turnover done down the rest of the curve.

“The sellers are still around, and [prices] have gone back down because they couldn’t go up. Buying interest was only able to produce what we’ve seen over the past two days,” the trader said.

Before today, the Dec-16s had posted two days of small gains that lifted prices by around 5% from a previous 10-month low of €6.56 hit on Monday.  The lacklustre recovery came after a fortnight of declines that slashed prices by nearly 20% since the end of 2015.

“[The small gains were] a bit of a ‘dead cat bounce’, with shorts taking some profits … but it provided an entry point to new shorts who see no reason for prices to rise back up,” a second trader said.

UTILITIES

But a third trader reiterated comments made by several observers over the past week, namely that the EU carbon market’s underlying fundaments have seen little change since the end of 2015.

“Carbon has shifted lower along with power and coal, so [clean] darks have stayed largely intact, and in fact they’re up at least 10% today,” he added.

Wednesday’s EUA price drop came alongside weakness in German power, UK gas and European coal, albeit declines in those markets were not as pronounced as carbon, thus helping to inflate the German clean dark spreads to levels not seen in nearly two weeks.

The third trader said firmer generation margins for European utilities could draw some buying from them.  Utilities, traditionally the largest natural buyers of EUAs, have largely been on the sidelines so far this year amid falling power prices, including record lows in Germany, and uncertainty surrounding both the health of the global economy and the future of their hedging practices amid an evolving regulatory landscape in the EU.

WTI crude oil futures sank to a fresh 13-year low near $26/barrel and US, European and Asian stock markets dropped to multi-year lows, as investors backed away from risky assets and concerns built over the slowdown in China’s economy and the global economy as a whole.

INDUSTRIALS & TECHNICALS

Several emissions traders repeated the view that at least one major industrial was also offloading EUAs in order to raise badly-needed cash.

“The oversupply in the EU ETS is an ever present issue that the market seems to ignore.  That shortfall in supply and demand is made up by industrials, and if a few big ones stop caring about the future because they’re dealing with short-term problems, that changes things,” the first trader said.

Industrials are sitting on most of the existing EUA supply glut, which is estimated at more than 2 billion units.

Many manufacturers are forecast to be net short permits during the EU ETS’ Phase 3 (2013-2020), but market participants have suggested these estimates may need to be adjusted due to lower production projections amid ongoing sluggish growth in the EU.

The second trader said some industrials were also seen selling part of their EUA inventories over the past two weeks in anticipation of others monetising a portion of theirs once they receive their 2016 free allocation from governments, which is expected before the end of February.

As for technicals, the first trader said all signals from EUA price charts go out of the window when market conditions sour as they have done.

“The RSI [on the Dec-16s] is back around 20, but is the selling overdone?  Not until people stop doing it.”

CERs also fell in sympathy with EUAs, with the front-year futures on ICE breaking through a key support at €0.38 to hit an intraday and 15-month low of €0.37.  The contract then recovered slightly to settle down 3 cents at €0.39 on light volume of 27,000 credits changing hands.

EUAAs

Meanwhile, a group of 25 EU member states earlier on Wednesday sold 683,500 spot EUAAs in the year’s first aviation allowance auction, which attracted bids totalling 3.87 million units from 12 participants.

The sale cleared at €6.57, just 3 cents below the Dec-16 EUA futures at the time the bidding ended – the lowest ever discount recorded in such an auction.

“It was a small auction and you’ve got compliance coming up.  Plus there’s been a trend of that discount declining,” the first trader said.

The EUA-EUAA discount recorded in last year’s sales dropped from 38 cents in May to 19 cents in the final sale of the year in November – translating into an average of 27 cents seen across all the auctions held after the Apr. 30 compliance deadline for 2014 emissions.

“Anyone who bought EUAAs last year landed a bit of a deal,” the trader added.

By Mike Szabo – mike@carbon-pulse.com