European carbon prices jumped on Monday on the back of a stronger energy complex, but market participants noted that a number of bearish factors may limit further gains.

Front-year EU Allowance futures trading on ICE closed up 27 cents at €5.44, after hitting a 10-day high of €5.49 earlier in the day.

Volume on the benchmark contract was strong at 23.6 million units traded.  Some 9.2 million allowances changed hands along the rest of the EUA futures curve, most of which were done on the Mar-17s.

“There are many positive technical signals. The Dec-16 contract has convincingly broken the downward trend since January last week,” wrote Vertis analyst Bernadett Papp in a weekly note, referring to the trading channel that has guided EUA prices to losses in excess of 40% since the start of the year.

The Dec-16 futures also closed Monday above their 20-day moving average for the first time since late 2015.

But today’s intraday high was also identified as the 23.6% Fibonacci Retracement level, a key technical point established during the EUAs’ crash recent to last week’s 22-month low of €4.62.

“Very strong technicals … suggest it is time for the price to consolidate. However this rosy picture for EUAs is challenged by extremely low clean dark spreads,” said head analyst Anatoly Stolbov at Prague-based Virtuse.

That view was echoed by other market participants, who noted that a collection of factors including the weak profit margins for coal-fired utilities could make EU carbon’s recovery short-lived.

UTILITY DEMAND

Despite higher German baseload power prices on Monday, the country’s clean dark spreads dropped to their lowest levels in nearly five years as next-year European coal prices gained 8% or almost $3 to $39.50/tonne since last Tuesday.

Coal inventories at Northwest Europe’s main import terminals also fell to a near two-year low as utilities were seen buying following higher power generation levels in Germany last week.

Pricier coal, coupled with higher EUAs, which are up nearly 16% over the same timeframe, has significantly increased the input costs for coal-burning power generators in Europe compared to a week ago, denting their appetite to sell forward power.

“In addition, there is the possibility that free [EUA] allocations start to come to market as long industrials look to raise cash from any excess. We understand that this factor will be muted this year by recent price falls,” said Redshaw Advisors.

Observers report that a handful of EU member states including Germany, Belgium, Denmark and Slovakia have mostly finished distributing their free allowances for 2016.

“We are next to done with the allocation for stationary installations – except for those cases waiting for the approval of the European Commission. And we will start allocating to aircraft operators this week,” a spokeswoman for Germany’s DEHSt told Carbon Pulse.

AUCTIONS

A return to larger auction volumes could also lean on prices this week.

Governments will sell 17.26 million spot allowances across five auctions, up around 3.5 million from last week’s 13.77 million.

A group of 25 EU nations earlier on Monday sold 3.425 million EUAs for €5.20 each, in an auction that cleared 3 cents below market and attracted 22 participants who submitted bids totalling 11.15 million units – the most recorded so far in 2016.

But despite the bearish signals, most market observers said they expect prices to consolidate around current levels rather than plumb new depths.

“We [see] slightly higher up- than downside risk. Our short-term technical signal is on the bullish side, while a significantly narrowed clean dark spread, higher auction volume and the free allocation due end of February weigh on the bearish side,” said analysts at Thomson Reuters Point Carbon.

“However, the current low carbon prices will in our view prevent a massive industrial sell-off.”

Technical analysts at Germany-based EnergyCharts GbR identified €5.80 as a target price for the latest rally should resistance levels below that be broken.

However, they noted that if EUAs head back down, a breach below the 22-month low of €4.62 would see prices drop to €4.

“€4.62 therefore represents an important bastion needed to regain the confidence of CO2 investors,” they wrote in an emailed note.

By Mike Szabo – mike@carbon-pulse.com