EU carbon prices hit a fresh two-month high on Wednesday after lawmakers agreed to significantly strengthen the MSR but soon faded as traders took profits built up in anticipation of the deal.
The Dec-15 EUA contract settled down 2 cents at €7.57 on ICE after falling back from a peak of €7.75 in the opening minutes of trade.
Healthly volume of over 15 million of the benchmark units changed hands on ICE, which also saw heavy turnover on the 2016 and 2017 futures of over 4.8 million and 3.1 million respectively.
The session open was the first opportunity to react since lawmakers announced the MSR deal late on Tuesday, which some analysts say could take enough excess supply from the market after 2019 to cause prices to triple from current levels.
Some market watchers were braced for carbon to break above its 2015 high of €7.90, expecting a spate of buying as traders grew more confident that the risk of sharp price falls had passed following the MSR deal.
Others were expecting prices to fall to as low as around €7.20 based on ‘buy the rumour, sell the fact’, whereby traders making bullish bets in anticipation of a strong MSR would close their positions to take profits as soon as a deal was announced.
“Today there was a mix of traders who sold the fact and others who went long so they balanced a bit,” said one trader.
He added that the MSR deal had stimulated renewed buying from bargain hunters expecting more gradual price increases throughout the rest of the year.
“Everybody in the market is expecting a price around €9 by the end of the year. If you have some cash, why not buy now? It might be the last quarter we see the price under €8,” he said.
The EU agreement would start the MSR in 2019 and fill it with 900 million backloaded permits. Several hundred million more unallocated units from Phase 3 that would have otherwise flooded the market will be added after that.
A stronger euro and weaker coal offset a drop in German power prices to boost German clean dark spreads, providing a signal for utilities to buy carbon.
The calendar 2017 and 2018 clean dark spreads for coal plants in the country with a 36% efficiency factor closed at €4.15/MWh and €3.81/MWh respectively – the highest closing levels seen so far in 2015.
By Ben Garside and Mike Szabo – firstname.lastname@example.org