EU carbon prices dipped below €7 on Thursday as traders digested news that member states had agreed a common position that the MSR should only start in 2021.
The benchmark Dec-15 EUA contract settled 2 cents down at €6.99 on ICE, fading in the final hour of the session after holding just in positive territory for most of the day.
Prices had dipped to as low as €6.91 on ICE in the opening minutes before briefly jumping to €7.29 in a move traders blamed on a mistaken trade, which was enough to trigger automatic orders to close positions.
After the market closed on Wednesday, EU member state officials agreed an MSR position that appeared weaker than a compromise proposal circulated in the preceding days.
Traders were divided over whether the news was bullish because it gives more certainty that the final bill will be agreed by June or bearish because it proposes a far weaker start than many governments had initially called for.
“I think the market had assumed that 2019 was a probable start date, so the outcome was disappointing and it certainly now seems a 2017 start is out of the question,” said one trader.
“The talks are ongoing and that is causing a lot of price volatility so it makes it difficult for people to go long with any confidence, though I can’t see prices falling below €6.80.”
Brokerage Consus lowered its forecast for Q2 spot EUA prices by 3.2% to €7.21, down from €7.45 a month earlier, due to the ongoing uncertainty over the MSR and slower-than-expected government allocations of free 2015 EUAs.
“The current MSR talks do not give hope for a quick agreement … The extended period of talks increases EUA price volatility and the lack of unanimity shall result in a reduction of their value,” Consus said in a note.
Spot prices currently trade at a 5 cent discount to Dec-15 EUAs.
Key energy contracts all posted gains due to stronger oil, which jumped as much as 6% on Thursday after Saudi bombing of Yemen sparked supply fears for the Gulf region.
Strong gains in dollar-denominated coal prices outpaced power price rises, which, coupled with a weaker euro, caused German clean dark spreads to narrow, dampening the incentive for power producers to buy carbon.
By Ben Garside – ben@carbon-pulse.com
