European carbon hit a fresh 20-month low on Tuesday morning before reversing course and finishing 2.5% higher after oil and wider energy prices staged a turnaround.
Front-year EU Allowance futures trading on ICE ended up 14 cents at their session high of €5.85 after having touched an intraday bottom of €5.46 – the lowest price recorded since Jun. 2, 2014 and marking a 4.4% loss on Monday’s settlement.
Volume on the benchmark contract was strong at 23.1 million units, with nearly 1 million units sold over the space of a minute at 1023 GMT, when prices plumbed Tuesday’s low.
“People were really pushing carbon lower in the morning, and then we drifted a bit until 1500 [GMT], at which point oil started to rise and carbon followed,” one trader said.
Front-month Brent crude slid throughout much of Tuesday, hitting a daily low of $32.23/barrel a few minutes before 1500 GMT before starting to climb back.
EU carbon and other energy prices followed suit, though traders were unable to point to a specific reason behind the reversal other than buyers emerging as front-month WTI oil briefly dropped below $30.
“It looked like a bit of a technical rebound, both on oil and carbon,” another trader said.
“Higher power prices and profit taking from shorts could explain some of the recovery, but the market reaction over the next few days will be key to see if further gains can be made or whether the market continues to set new lows,” added Redshaw Advisors trader Tom Lord.
EUAs have rediscovered a strong correlation with crude oil, a phenomenon that has not been widely observed since both commodities touched all-time highs within days of each other in July 2008.
Tuesday’s low for EUAs translated into a 34% fall from 2015’s end, as traders and analysts alike would not rule out more downside for battered EU carbon.
Analysts Energy Aspects late last week slashed their EUA forecasts by 30-40% over the next five years, warning that downside risk remains and that “the market looks set to bet against any price increases.”
Meanwhile, a group of 25 EU member states on Tuesday sold 3.425 million spot EUAs for €5.57 each, in an auction that cleared 6 cents below market and attracted bids worth a total 7.39 million units.
Some 26 bidders participated in the auction, which was the most since early 2014.
On Wednesday, Poland will hold its first auction of 2016, and at 3.526 million units, the country’s auctions this year feature the most units being put up for sale.
German baseload power ended little changed after erasing losses posted earlier, while European coal finished lower but off its session lows.
By Mike Szabo – mike@carbon-pulse.com
