EU carbon tumbled on Monday to retest the 20-month low touched last week, as selling resumed on the back of a bearish analyst report and a weaker energy complex.
The Dec-16 EUA futures fell by as much as 46 cents or 7.6% to hit €5.61 – the lowest level since seen June 2014 – before clawing back a few cents to €5.71 by 1510 GMT.
Volume was moderate at just over 16 million units traded on ICE by that point.
Analysts at Energy Aspects late last week slashed their EUA price forecasts for the next five years by 30-40%, as the bullish sentiment that led the market higher in 2015 has dissipated and the bearish reality of ample supply and scarce demand that has for years plagued the EU ETS returned.
Citing a number of bearish factors, the analysts foresee front-year prices averaging €6.60 this year before falling to €5.25 in 2018.
They said there is no “fundamental price floor” that might halt the current price fall, adding that “there simply is no good reason for market sentiment to go back to being bullish.”
However, after hitting their bottom last Tuesday, prices climbed back to reach an intraday high of €6.28 on Friday, marking a near 12% swing that may have prompted some speculators playing the ‘dead cat bounce’ to take some more profits off the table amid growing bearish sentiment.
Meanwhile, Brent crude oil was down by around $1.40 to $34.60/barrel, as weak Chinese economic data weighed and after Saudi Arabia said it was open to cooperating with other oil producers but stopped short of proposing output cuts.
German baseload power prices followed carbon lower on Friday, shedding some 3% across the board.
The impact of this on the clean darks, however, was muffled by plummeting carbon, as well as softer Rotterdam coal and a firmer euro, resulting in the spreads staying more or less flat compared to Friday.
Earlier on Monday, Vertis analyst Bernadett Papp said: “In a positive scenario, [EUA] prices might retest the Fibonacci level at €6.65 … before visiting €7.00 again.”
“The declining trend of January, however, is still unhurt, which might make us cautious.”
According to BNEF analysts, EU carbon’s correlation with previously little-connected asset classes has increased in the past few weeks.
EUAs showed the closest correlation with the S&P 500 last week, recording a coefficient of 0.81 compared to 0.49 over the past month.
European energy prices also grew more closely correlated to carbon, with German power, Brent crude, and Dutch and UK gas all recording coefficients of 0.70 or higher.
Energy and equity markets around the world fell in unison in January amid concerns over China’s economic growth, so correlation levels between them rose.
By Mike Szabo – mike@carbon-pulse.com
