European carbon dipped slightly in quiet trade on Friday to post an 8.2% weekly loss as sellers continued to exert downward pressure on prices, which again tested their recent 20-month lows.
The benchmark Dec-16 EU Allowance futures on ICE settled down 5 cents at €5.57 after notching a €5.47-5.65 trading range for the day, which at 18 cents was the narrowest in a month.
At 12.3 million units changing hands, volume on the front-year contract was also light compared to the levels above 15 and 20 million seen during most days so far this year.
“The second half of this week has given mixed signals on the future direction of the market but has at least provided some welcome stability,” said Tom Lord of Redshaw Advisors.
“We’re finally taking a breather here, but I’m not so sure we’re done [falling] … These days it doesn’t take much [to knock prices], just some emotion,” another trader said, referring to the lack of strong fundamental reasons for EU carbon, which has lost a third of its value since the end of 2015.
“Some are finding it very difficult to trade … It’s unpredictable and has been getting more and more erratic,” he said, adding “Where do we go from here? It’s difficult to say as there are arguments for both sides.”
Some market participants have said that the EUA sell-off that has opened 2016, which has wiped out all the gains posted since the MSR was agreed by EU lawmakers less than a year ago, is now overdone and that there are some bargains to be had at current prices, which are the lowest since June 2014.
On the other hand, bearish observers note that demand from utilities, traditionally the biggest buyers of carbon, has waned and will remain muted for years on the back of low power prices and profit margins, an accelerating switch from coal towards gas-fired power, and as the hedging behaviour of many firms in the sector becomes constrained by the EU’s MiFID regulations.
“If people are waiting for utilities to come in and start buying [EUAs], they should read the papers … It’s not great out there right now,” the trader added.
That said, he noted that German clean dark spreads were this week at their highest since mid-January.
The spreads fell on Friday on the back of weaker German baseload power prices, but were still up by as much as 25% for the week.
EUAs also resumed their tracking of crude oil prices on Friday, with front-month Brent down by 0.8% at $34.18/bbl shortly after 1700 GMT.
The Dec-16s jumped by 9 cents to €5.60 earlier in the day on the results of Germany’s EUA auction, which cleared at a massive 7 cents above the secondary market.
The sale attracted bids from 22 participants totalling 8.95 million units, translating into an oversubscription rate of 2.56, which was the highest since Jan. 28.
At 17.26 million units, government auction volumes for next week remain near this week’s levels.
Some participants have noted that January’s auction volumes were lower year-on-year, meaning that the additional supply due to hit the market this year stemming from Backloading will only really start to be sold in February, which will see 28% more EUAs sold compared to the same month in 2015.
Below are this past week’s EUA auction results, featuring the clearing price, distance to secondary spot market price on ICE at the time the bidding window closed, and bid-to-cover ratio:
And next week’s scheduled EUA sales:
|Implied EUA carry trade annual returns||German clean dark spreads|
|Dec-16||Dec-17||Dec-18||Dec-19||Cal Yr||Price||Wk chg|
|Dec-18||2.448%||(based on 38% efficiency factor)|
|(does not include transaction costs)|
By Mike Szabo – firstname.lastname@example.org