EU Market: Carbon dips to €5 to post another weekly loss

Published 18:49 on February 26, 2016  /  Last updated at 16:52 on March 4, 2016  /  EMEA, EU ETS  /  No Comments

EU carbon prices slipped to €5 on Friday to post their seventh weekly loss out of eight for the year, though traders grew more certain that a bottom has been reached.

EU carbon prices slipped to €5 on Friday to post their seventh weekly loss out of eight for the year, though traders grew more certain that a bottom has been reached.

The Dec-15 EUA contract settled down 8 cents at €5.00 on ICE, near the bottom of the day’s €4.94-5.24 range on relatively thin volume of 13.6 million.

That put the benchmark carbon contract down 17 cents on the week, but well above its low point on Wednesday of €4.67, which was just five cents off the 22-month low hit earlier this month.

Traders said prices had climbed on Friday in anticipation that higher power prices would trigger an uptick in utility buying, but EUAs faded when that did not emerge.

“We saw steady gains on the Cal-17 and I was expecting some utilities to step in, but there seems to be decent support to keep EUA prices near €5,” one trader said.

Spurred by overnight gains in oil prices, Cal-17 baseload German power prices ended up 18 cents or 0.8% at €21.66/MWh on EEX, having hit as high as €21.75/MWh earlier.

This helped push clean dark spreads to their highest since Tuesday and up around 10% week-on-week, boosting the incentive for utilities to buy carbon.

Carbon prices ticked up to the day’s high after the Germany’s auction, which cleared 3 cents below market at €5.08 with bid coverage of 1.76, well below the 2.37 average of other sales this week.

Next week’s auction supply nudges slightly higher at 17.3 million, from 17.26 million this week, as Poland’s sale replaces the fortnightly UK one on Wednesday.

FREE ALLOCATION

Traders have been preoccupied with the potential market impact of an influx of supply from cash-strapped smaller industrial companies, particularly from economically-depressed parts of southern Europe.

Industrial firms are in the process of receiving their 2016 free EUA allocations from member states.

While some have reported crisis-hit industrials being keen to sell, others doubt the relatively small scale of supply would be enough to impact the price.

The EU’s biggest emitter Germany has issued 129 million EUAs to stationary installations, some 91% of those entitled to an allocation, according to a government spokeswoman on Friday.

“We will issue the rest successively in line with the decisions of the European Commission,” she said.

The Netherlands will issue 374 installations with a total 43.7 million units from tonight, the government said, adding that 10 airlines will also receive 1.2 million EUAAs.

The government said that 22 companies were temporarily suspended from getting their EUAs as it attempts to calculate how many they are to receive following decreases in production.

The Commission is due to publish a status update on the free allocations on Mar. 3.

2030 REVIEW

EU environment ministers will discuss the bloc’s 2030 climate and energy goals in the light of the Paris Agreement next Friday.

The meeting serves as a preview to a debate by EU leaders on Mar. 17-18, where expectations are low among observers for any commitment to any deeper ambition that the 40% emission reduction goal already agreed.

This is despite Commission officials admitting that the proposed deeper ETS trajectory of 2.2% is not enough to put the bloc on a smooth track to meeting its 2050 emission goal.

EU carbon prices are almost 40% below where they were when the Paris Agreement was struck mid-December, prompting some market participants to call for lawmakers to step up their efforts to reform the system.

“The UK, Germany … everyone seems to have an excuse for not being the one to speak up about reform, but sooner or later someone will have to,” said one trader, pointing out that both of those countries have been focused on Brexit and immigration issues in the period since Paris.

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:

22/02/2016 EU 3,425,000 €5.20 -0.03 3.25
23/02/2016 EU 3,425,000 €5.14 -0.07 2.61
24/02/2016 UK 3,489,500 €4.69 -0.03 1.63
25/02/2016 EU 3,425,000 €4.78 0.00 1.98
26/02/2016 DE 3,495,000 €5.08 -0.03 1.76

 

And next week’s scheduled EUA sales:

29/02/2016 EU 3,425,000
01/03/2016 EU 3,425,000
02/03/2016 PL 3,526,000
03/03/2016 EU 3,425,000
04/03/2016 DE 3,495,000

 

Implied EUA carry trade annual returns German clean dark spreads
Dec-16 Dec-17 Dec-18 Dec-19 Cal Yr Price Wk chg
Spot 0.494% 0.774% 0.992% 1.142% 2017 €3.91/MWh +0.35
Dec-16 1.000% 1.193% 1.320% 2018 €3.12/MWh +0.31
Dec-17 1.386% 1.478% 2019 €3.03/MWh +0.24
Dec-18 1.563% (based on 38% efficiency factor)
(does not include transaction costs)

By Ben Garside – ben@carbon-pulse.com

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