EU Market: Energy ‘relief rally’ lifts EUAs, but sellers cap gains as prices fall 5.4% for week

Published 20:13 on January 22, 2016  /  Last updated at 17:20 on January 25, 2016  /  EMEA, EU ETS  /  No Comments

European carbon allowances rose by 2.4% on Friday on the back of a wider 'relief rally' in energy prices, but slipped back from their session high as sellers emerged late in the day to scupper attempts to recover more of this month’s steep losses.

European carbon allowances rose by 2.4% on Friday on the back of a wider ‘relief rally’ in energy prices, but slipped back from their session high as sellers emerged late in the day to scupper attempts to recover more of this month’s steep losses.

Front-year EUA futures on ICE settled down 15 cents at €6.36, near the middle of the day’s €6.23-6.55 trading range, on volume of 19.7 million units, which was some 10 million lower than recent days.

The benchmark contract rebounded after hitting a 15-month low of €5.87 on Thursday afternoon, recording a 5.4% drop for the week, or around half of the 10% falls notched in each of the two previous weeks.

“Power is up massively so carbon rode that higher, but sellers came in to push [EUA] prices down every time they crossed €6.50,” one trader said.

Calendar-year German baseload power rose between 3.3% and 4.6% on Friday, bouncing off record lows plumbed earlier this week.

European coal was also up by more than $1/tonne, though this, along with a softer euro, wasn’t enough to hold back gains in the German clean dark spreads, which gained between 7% and 17% to end a volatile week.

A second trader said some short-covering also helped lift EUAs, but noted that a burst of selling of at least 500,000 units, likely from speculators, hit prices between 1610 and 1620, sending them back to near Thursday’s settlement.

“There don’t appear to be too many on the buyside as buyers remain very nervous, so this recovery looks a bit fragile,” he said, adding that he hasn’t yet seen a resumption in steady buying from European utilities, the main source of demand for EUAs.

The Dec-16 EUA futures are now 8.3% off this week’s bottom but remain down some 23% from the end of 2015.

Market observers have attributed the sharp decline mainly to speculators selling on the back of increased supply from government auctions this year and wider weakness in global energy and equity markets.

Some said the drop was exacerbated by the absence of utility buying due to poor profit margins and a few big industrials dumping spare allowances to raise cash.

Germany’s sale of 3.495m spot EUAs cleared 4 cents below secondary market levels, with relatively low bid coverage of 1.84.

The oversubscription rate across this week’s four EUA auctions averaged just 2.28, just under last week’s 2.42 and well below the 2015 average of 3.06.

CERs also fell in sympathy with EUAs this week, with the front-year futures on ICE breaking through a key support at €0.38 on Wednesday to hit an intraday and 15-month low of €0.37.

The contract ended the week at €0.39, down 4 cents or 9.3% from last Friday, on turnover of 403,000, according to ICE data.

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:

18/01/2016 EU 3,425,000 €6.52 -0.05 1.82
19/01/2016 EU 3,425,000 €6.81 +0.01 2.70
20/01/2016 EU 683,500 EUAAs €6.57 +0.02 5.66
21/01/2016 EU 3,425,000 €6.04 +0.02 2.80
22/01/2016 DE 3,495,000 €6.33 -0.04 1.84

 

And next week’s scheduled EUA sales:

25/01/2016 EU 3,425,000
26/01/2016 EU 3,425,000
27/01/2016 UK 3,489,500
28/01/2016 EU 3,425,000
29/01/2016 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 0.871% 1.157% 1.400% 1.704% 2017 €3.57/MWh -0.42
Dec-16 1.415% 1.638% 1.959% 2018 €2.65/MWh -0.48
Dec-17 1.860% 2.230% 2019 €2.34/MWh -0.83
Dec-18 2.588% (based on 36% efficiency factor)
(does not include transaction costs)

 

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

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