European carbon prices climbed back from a five-day low to end Monday little changed, recovering earlier losses alongside crude oil, but market observers noted several bearish warning signs ahead.
The front-year EU Allowance futures trading on ICE closed down a cent at €5.47, with volume moderate at 9.7 million.
Turnover down the rest of ICE’s EUA futures curve was light at 934,000.
Several market participants noted that EUA prices could face headwinds following the 15% rise posted over the past three weeks, which led to the Dec-16s hitting a 10-week high of €5.67 last Tuesday.
They also cautioned on bearish pressure from higher auction volumes over the next fortnight and softer demand from fewer emitters reportedly looking to pick up carbon units ahead of the Apr. 30 EU ETS compliance deadline.
“The compliance buying peak is probably behind us and we expect it to tail off from now on, thus removing a source of demand,” said Redshaw Advisors in a weekly note to clients.
“A major change in direction isn’t obviously on the cards because an EUA shortfall is still forecast for this year and at some point … utility demand should outweigh available supply,” they added.
“If the market doesn’t go down this week and next, when compliance buying has all but dried up, we may well be experiencing that utility demand that will set the scene for price evolution over the next few months.”
TECHNICALS AND OIL
Analysts at Thomson Reuters Point Carbon said they expect prices to “test the downside this week amid signs of a bearish correction provided by technical indicators.”
“Additional downward pressure could come from narrowing clean darks spreads and an increase in auction volumes. Further direction will come from the developments in crude oil prices following the failed Doha deal on Sunday,” they added.
Brent crude prices tumbled by as much as 7% to $40.10/barrel after a deal to freeze production, involving the 18 oil-exporting nations that met on Sunday in the Qatari capital, fell apart due to Iran rejecting Saudi Arabia’s demands to reduce supply. But prices had completely pared their losses by the time of writing.
“If we take into consideration the strong correlation observed between the price of carbon and that of Brent in the first few months of 2016, today’s weak opening of the EUA market should be no surprise,” said Bernadett Papp of Budapest-based brokers Vertis.
Dec-16 prices opened at €5.45 but quickly dropped to the session low of €5.36, a level around which had previous acted as technical resistance for the contract.
“We got this break last week [above €5.49] … and abjectly failed to build upon it. But we do seem to be finding support at €5.36, which looks like a good reference level if you look back at intraday charts,” said Clive Lambert of technical analysts FuturesTechs.
“The mission for the bulls this week is to defend this level then take us through resistance at 5.67, at which time we can target Fibonacci resistance at €6.19.”
AUCTIONS
But several observers pointed to higher auction volumes as potentially weighing on prices, with governments poised to sell 17.26 million spot units this week – up from the 13.77 million that came to market last week.
Sale quotas then rise slightly to 17.3 million next week, before dropping to lower levels until mid-June.
A group of 25 EU member states on Monday sold 3.425 million EUAs for €5.38 each, in an auction that cleared 2 cents below the secondary market and attracted 21 participants who collectively submitted bids worth 7.77 million units.
That translated into an oversubscription rate of 2.27, which was roughly in line with the average recorded so far this year.
Meanwhile, Rotterdam-delivery coal prices gained nearly $1 on ICE on Monday, which dented clean dark spreads across Europe.
“The question of the week is if the small [EUA] compliance buyers are able to counterbalance all these negative factors,” said Vertis’ Papp.
By Mike Szabo – mike@carbon-pulse.com
