EU Market: Late sell-off clips weekly gains to 1.1% following 10-week high

Published 20:15 on April 15, 2016  /  Last updated at 15:52 on April 22, 2016  /  EMEA, EU ETS

European carbon declined on Friday, selling off in the final few minutes on speculative profit-taking to post a weekly gain of 1.1% after hitting a 10-week high of €5.67 on Tuesday.

European carbon declined on Friday, selling off in the final few minutes on speculative profit-taking to post a weekly gain of 1.1% after hitting a 10-week high of €5.67 on Tuesday.

The front-year EUA futures on ICE settled down 13 cents at €5.48 on Friday on moderate volume of 11.9 million units.

That represented almost 80% of the total 15.1 million allowances changing hands on ICE.

The benchmark contract bounced off its session high of €5.62 several times in the morning, before sellers took over and pushed prices to as low as €5.44.

“Some possible factors for today’s falls include long risk reduction into the weekend, large falls in the clean dark spreads yesterday reducing utility demand, and maybe waning demand as we near the Apr. 30 compliance deadline,” said Tom Lord of Redshaw Advisors.

The decline came alongside weaker crude oil prices, which fell by more than $1/barrel on doubts that a meeting this weekend of major producers would result in an agreement to curb supply.

EUAs also rebuffed a more-than 1% rise in German baseload power prices, which led to daily gains of upwards of 10% for the German calendar-year clean dark spreads.

This came in the face of higher European coal prices, which have risen by almost 6% this week on the back of falling output and sellers buying to fulfil orders.

EU carbon prices were little moved by Friday’s German EUA auction, which saw 3.495 million spot units sold for €5.54 each – a cent below the secondary market.

That represented the first discount seen in a government EUA auction recorded since last week, as each of the three previous sales this week cleared at a 2-cent premium.

The auction attracted 19 participants who collectively submitted bids totalling 9.07 million units, translating into a higher-than-average oversubscription rate of 2.6.

In fact, Thursday’s and Friday’s auctions saw the strongest coverage ratios since Mar. 11, possibly indicating more interest in the near-daily sales from emitters looking to scoop up allowances ahead of the Apr. 30 deadline.

EUA carry trade yields, however, plumbed new 2016 lows this week, calling into question whether the heightened auction interest can be maintained into next month.

The annualised yield implied by the spot-Dec.18 fell to 0.68%, down from 0.75% last Friday and from 1.257% at the end of 2015.

And the annualised yield for the Dec.16-Dec.19 play dropped to 1.026% from 1.098% last Friday and from 1.627% at the end of 2015.

“Above-average wind and solar production expected and a full auction schedule will put a pressure on the price for the next week,” said Libusa Reveszova, an analyst with Virtuse, adding that technical indicators are also pointing to bearish pressures.

“Our outlook for the next week is therefore neutral-to-bearish.”

Lord added: “[Today’s] price action sets a bearish tone going into next week however today’s move down does not yet signify a change in direction. Early trading on Monday will likely test the downside and will set the scene for the direction of trading next week.”

Government auction volumes rise to 17.3 million per week over the next fortnight, up from 13.77 million this week and potentially putting additional downward pressure on EUA prices.

Sale volumes then drop to lower levels for six straight weeks starting in early May, reduced due to several holidays and two mid-week EUAA auctions.

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:

11/04/2016 EU 3,425,000 €5.42 +0.02 1.88
12/04/2016 EU 3,425,000 €5.63 +0.02 2.35
13/04/2016 DE 857,500 EUAAs €5.42 N/A 3.84
14/04/2016 EU 3,425,000 €5.47 +0.02 2.65
15/04/2016 DE 3,495,000 €5.54 -0.01 2.60


And next week’s scheduled EUA sales:

18/04/2016 EU 3,425,000
19/04/2016 EU 3,425,000
20/04/2016 UK 3,489,500
21/04/2016 EU 3,425,000
22/04/2016 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 0.269% 0.544% 0.680% 0.886% 2017 €3.58/MWh -0.15
Dec-16 0.730% 0.818% 1.026% 2018 €3.02/MWh +0.15
Dec-17 0.906% 1.174% 2019 €3.26/MWh +0.43
Dec-18 1.436% (based on 38% efficiency factor)
(does not include transaction costs)

By Mike Szabo –