EU Market: Carbon notches 1% weekly drop, could be readying for breakout

Published 18:16 on March 18, 2016  /  Last updated at 17:23 on March 24, 2016  /  EMEA, EU ETS

European carbon dipped in quiet range-bound trade on Friday to post a small 1% weekly drop, with prices potentially positioning themselves for a technical breakout next week.

European carbon dipped in quiet range-bound trade on Friday to post a small 1% weekly drop, with prices potentially positioning themselves for a technical breakout next week.

The front-year EU Allowance futures on ICE settled 6 cents lower at €4.95 on light volume of 9.7 million units traded.

Turnover down the rest of the ICE curve was moderate at 3.8 million, the vast majority of which appeared to be time spread trades done as blocks involving the spot, Dec-17 and Dec-19 contracts.

The benchmark Dec-16 contract traded between €4.91-5.04, one of the narrowest intraday ranges seen this year.

This kept prices within the technical ‘pennant’ formation that has taken shape since mid-February.

Pennants are formed during periods of consolidation, and typically culminate in prices emphatically breaking either to the upside or the downside.  This was observed in the EU carbon market last June.

The rightmost tip of the latest triangular flag formation will be reached either next week or the week after, potentially setting the bellwether carbon contract up for a sizeable gain or fall.

“Despite lower auction volumes and compliance buying the market failed to rise. We are looking for a break-out in one direction or another next week but we end this week as we began, without huge conviction but a bias to the downside,” said Redshaw Advisors in an emailed note.

Germany earlier in the day sold 3.495 million spot EUAs for €4.92 each, in an auction that cleared a cent above the secondary market and attracted total bids of 6.89 million units from 18 participants.

At 13.76 million units, next week’s shortened trading week will see the fewest allowances offered so far this year.

European emissions exchanges are closed on Mar. 25 and 28 for Easter.

The following week also features a curtailed quota of 13.87 million EUAs, before volumes rise back to 17.26 million for the week starting Apr. 4.

Meanwhile, EUAs once again appeared to ignore moves in peripheral energy prices on Friday.

With a daily gain of 84 cents to $42.55/tonne, front-year European coal continued to march higher, pushing the futures curve further into backwardation.

Gains of almost 1.5% in German baseload power, coupled with lower carbon, led to a modest rise in German clean dark spreads.  Brent crude was largely unchanged.

Emissions covered under the EU ETS were mostly unchanged last year compared to 2014, a poll of six analysts taken by Carbon Pulse showed.

The European Commission will release preliminary emissions data for 2015 on Apr. 1.

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:

14/03/2016 EU 3,425,000 €4.92 -0.02 2.27
15/03/2016 EU 3,425,000 €4.81 +0.02 2.47
16/03/2016 EU 683,500 EUAAs €4.94 N/A 3.84
17/03/2016 EU 3,425,000 €4.92 -0.05 1.75
18/03/2016 DE 3,495,000 €4.92 +0.01 1.97


And next week’s scheduled EUA sales:

21/03/2016 EU 3,425,000
22/03/2016 EU 3,425,000
23/03/2016 UK 3,489,500
24/03/2016 EU 3,425,000


Implied EUA carry trade annual returns German clean dark spreads
Dec-16 Dec-17 Dec-18 Dec-19 Cal Yr Price Wk chg
Spot 0.537% 0.692% 0.878% 0.961% 2017 €3.57/MWh -0.26
Dec-16 0.808% 1.005% 1.069% 2018 €2.75/MWh -0.19
Dec-17 1.202% 1.199% 2019 €2.71/MWh -0.22
Dec-18 1.188% (based on 38% efficiency factor)
(does not include transaction costs)


By Mike Szabo –