EU Market: EUAs post 1.1% weekly drop, as buyers’ return seen offsetting heftier sales

Published 18:39 on August 28, 2015  /  Last updated at 15:16 on May 11, 2016  /  EMEA, EU ETS  /  No Comments

EU Allowance prices ended higher on Friday as firmer German power prices helped support, but the gains weren’t enough to push the benchmark carbon contract into the black for the week.

EU Allowance prices ended higher on Friday as firmer German power prices helped support, but the gains weren’t enough to push the benchmark carbon contract into the black for the week.

The Dec-15 EUA futures trading on ICE Futures Europe settled up 7 cents at €8.12, marking a 1.1% weekly decline.

“This was a risk-off week,” one trader said, citing falls in wider energy and equity markets worldwide.

Financial markets experienced a rollercoaster week due to concerns over China’s economy and the attempts by the government there to stabilise collapsing stock prices.

That volatility carried over to energy markets, with crude oil on track to notch a 10% weekly gain.

EUA trading volume was light at 7.4 million units changing hands on ICE on the front-year contract on Friday, with a further 4.2 million done down the rest of the curve – most of which was linked to time spreads.

“After such a crazy week, specs aren’t going to open new positions going into a long weekend,” another trader said, referring to Monday’s UK bank holiday, during which trade is expected to be muted and an EUA auction will not be held.

German calendar-year baseload power prices rose to finish the week near last Friday’s levels, while front-year European coal posted a 1.4% weekly decline.

The euro also shed some 200 basis points or nearly 1.8% against the US dollar over the past five sessions.

These factors, combined with marginally lower carbon, combined to slash between 10% and 17% off German clean dark spreads, pushing them back to levels not seen since early August and dampening demand for EUAs.

An impending rise in government allowance auction volumes also weighed on prices this week, with sale quotas set to more than double following August cuts imposed due to weaker summer demand.

Sales will rise to 12.16 million units next week.

That’s up from 5.98 million this week, which ended with Germany offloading 1.599 million allowances for €8.04 each in an auction that cleared a cent below market and attracted bidding interest worth 5.88 million units.

But some market participants said that the bearish sentiment arising from the increase in EUA sales next week would be offset by the return of some buyers to the market following the summer holidays.

“Carbon is fundamentally bullish, and while more volume is coming back next week, so is utility hedging,” the first trader said.

Analysts at Energy Aspects said they expect some power generators to start hedging 2018 output in the second half of this year.

In a report published on Friday, the analysts also noted that open interest on the Y+1 to Y+5 EUA futures on ICE are down year-on-year, while open interest on the front-year contract is up.

“With most utilities having very high levels of 2015 hedges in place for the start of the year, this may suggest more speculative net longs in the market. That is certainly possible as most participants (and analysts) are generally bullish prices, with Backloading tightening up the market by helping to erode inventory, and if there is a commodity with a ‘buy and hold’ strategy attached to it, that is probably carbon.”

Friday’s auction marked the final sale in August.  Just over 27 million allowances were sold this month at an average price of €8.06 each.

Demand for the units appeared strong, with the average sale clearing in line with spot prices and attracting 3.49 times the number of permits on offer – the highest average monthly oversubscription rate seen since February.

However, at 14.6 bidders per auction the average number of participants in August was the lowest so far this year, extending a monthly decline in the figure for a fifth straight month, but was 2.1 bidders higher than this time last year.

Below are this past week’s EUA auctions, clearing price, distance to secondary spot market, and bid-to-cover (btc) ratio:

8/24/2015            EU          1,459,000             €8.08     +0.00    btc 3.76
8/25/2015            EU          1,459,000             €8.22     +0.02     btc 3.46
8/27/2015            EU          1,459,000             €8.07     +0.00     btc 4.30
8/28/2015            DE          1,599,000             €8.04     -0.01      btc 3.67

And next week’s scheduled sales:

01/09/2015          EU          2,918,000
02/09/2015          UK          3,123,000
03/09/2015          EU          2,918,000
04/09/2015          DE          3,198,000

Implied EUA carry trade annual returns German clean dark spreads
Dec-15 Dec-16 Dec-17 Dec-18 Cal Yr Price Wk chg
Spot 1.259% 1.034% 1.168% 1.289% 2016 €4.12/MWh -0.44
Dec-15 0.985% 1.163% 1.292% 2017 €3.20/MWh -0.66
Dec-16 1.341% 1.457% 2018 €3.21/MWh -0.51
Dec-17 1.564% (based on 36% efficiency factor)
(does not include transaction costs)

 

By Mike Szabo – mike@carbon-pulse.com

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