European carbon firmed in a quiet Friday session to end a week that saw prices trade in their narrowest range so far this year.
Front-year EUA futures ended up 3 cents at €7.62 on ICE, after trading in a weekly 24-cent range of €7.50-7.74 – the tightest since late November. The futures gained 0.7% on last Friday’s settlement.
Volume on the Dec-15s on Friday was light at fewer than 10 million units, as many traders across much of Europe took leave to bridge Thursday’s holiday with the weekend.
The benchmark EUA contract slipped to a session- and week-low of €7.50 in the minutes following Friday morning’s German allowance auction, but regained its footing over the next two hours as buyers returned.
Germany sold 3.2 million spot EUAs for €7.48 each, which was in line with prompt prices at the time the auction ended. Bidding interest was healthy at 10.5 million units – the most since Monday.
“The market absorbed it quite well,” one trader said.
Prices could come under some pressure next week as EUA supply from government auctions rises to 14.8 million units – the highest since mid-April.
Trading activity further down the EUA futures curve on Friday was busier than would be typically expected during a holiday bridge day.
Volume of around 2.3 million units was done on the Dec-16s and more than 4.2 million on the Dec-17s – 3 million of which appeared to be involved in a spot-2017 carry play.
“There’s been some interest on the 16s and 17s, as the time spreads have been relatively stable,” the trader added.
The annual yield implied between spot and Dec-17 prices has risen, climbing back above 2.3% on Thursday after flirting with 2% late last week.
A higher yield can indicate selling pressure in the nearer-term contract (for example as a result of more supply hitting the market from spot EUA auctions), or buying interest in the further out one (for example as a result of increased carbon buying by forward-hedging utilities).
Meanwhile, German baseload power prices firmed on Friday, while UK gas and coal for delivery in Europe slipped.
| Implied EUA carry trade annual returns | German clean dark spreads | |||||||
| Dec-15 | Dec-16 | Dec-17 | Dec-18 | Cal Yr | Price | Wk chg | ||
| Spot | 0.678% | 0.903% | 1.106% | 1.404% | 2016 | €4.41/MWh | +0.08 | |
| Dec-15 | 1.050% | 1.239% | 1.545% | 2017 | €4.17/MWh | +0.14 | ||
| Dec-16 | 1.429% | 1.807% | 2018 | €3.72/MWh | +0.04 | |||
| Dec-17 | 2.177% | (based on 36% eff. factor) | ||||||
| (does not include transaction costs) | ||||||||
By Mike Szabo – mike@carbon-pulse.com
