EU carbon prices fell sharply on Tuesday, dropping below €5 to give back all of the previous week’s meagre gains and nearing their 22-month low.
The Dec-15 EUA contract settled down 51 cents at €4.91 on ICE, near the bottom of the day’s €4.87-5.41 range, on brisk turnover of 25.5 million.
Traders said carbon was dragged lower by falling oil prices and the drop was exacerbated by a weak auction result, stoking fears that the market would struggle to absorb this week’s heavy auction volume.
“When oil turned south, it looked like an excuse to sell EUAs as well,” one said.
Front-month Brent crude oil fell as much as 4.6% to $33.09/barrel after Saudi Arabia’s oil minister ruled out output cuts, causing prices to mostly erase Monday’s 5% rise, which was attributed to the IEA’s forecast of declining US shale production.
Carbon prices headed from the early minutes of Tuesday’s session and dropped a further 8 cents after the EU’s auction of 3.425 million spot EUAs at 1000 GMT.
The sale cleared at €5.14, some 7 cents below market. That was the biggest discount seen in three weeks, though at 2.61 bid coverage was above the year’s average.
The trader added that the issuance of 2016 free allocation to industrials was also weighing on the market.
Market participants expect governments to complete handing out the units this week, though one broker said he was yet to observe any rush to sell from cash-strapped companies.
“So far we haven’t had any sellers … We have some orders but they were placed quite high, around the €7.00-7.50 level,” he added.
BEARISH OUTLOOK
Even as prices soared to a 10-day high of €5.49 on Monday, analysts had been hesitant to call an end carbon’s rout following the market’s first weekly gain this year.
EUAs rose some 10 cents last week, after six successive weekly losses that slashed more than 40% off prices since the end of 2015 and sent prices to €4.62, their lowest since 2014.
They cited several bearish factors on the horizon, including this week’s 25% uptick in supply from auctions.
“The market continues to carry a large amount of inventory and we need to wait and see if there is more selling to come, or if prices will gradually recover from current levels,” analysts at Energy Aspects wrote in a weekly note.
“While weather looks supportive, the additional auction volumes will weigh on the bid side. We would not be surprised to see a return to week/week drops, although we do not expect to see another big sell off,” they added.
Meanwhile, today’s drop in carbon coupled with an oil-led decline in coal prices pushed German clean dark spreads higher by upwards of 15%, though this was a relatively small gain with spreads remaining near their lowest in five years.
By Ben Garside – ben@carbon-pulse.com
