EU Market: EU carbon slips on wider market weakness to post small weekly loss

Published 18:39 on September 4, 2015  /  Last updated at 15:15 on May 11, 2016  /  EMEA, EU ETS  /  No Comments

EU carbon prices slipped on Friday along with wider energy and financial markets, with the benchmark EU Allowance contract posting a meagre 0.2% loss for the week.

(Auction dates in bottom table corrected)

EU carbon prices slipped on Friday along with wider energy and financial markets, with the benchmark EU Allowance contract posting a meagre 0.2% loss for the week.

Front-year EUA futures trading on ICE Futures Europe lost 8 cents or 1% in the final trading session of the week, settling at €8.10 on light turnover of 5.8 million units including 2.7 million in block volume, which appeared to be linked to 2.3 million units done on the Mar-16s.

Trade down the rest of the curve was also scant with a total 1.4 million units changing hands excluding the Mar-16 block volume.

A number of traders were away from their desks today following a party hosted in London on Thursday night by German energy bourse EEX.

“The market seems to have an EEX hangover, partly literal and partly due to falling power prices negating yesterday’s gains,” said Louis Redshaw of Redshaw Advisors.

“With markets everywhere experiencing pain, carbon is no exception as traders trim exposure ahead of another weekend of uncertainty in relation to global markets.”

Major equity indexes in Europe and North America dropped between 1.5% and 3% on Friday after the US published non-farms job data showing a lower-than-expected 173,000 jobs were created in August, adding more uncertainty to whether the US central bank would raise interest rates later this month.

German baseload power dropped by around 1% across the board, wiping out Thursday’s gains, while European coal prices were also weaker.

The euro inched higher against the dollar but it wasn’t enough to support the German clean dark spreads, which fell by between 2% and 4% on Friday to end steady compared to last week.

EUAs dropped by 5 cents in the final moments of Friday’s permit auction, but climbed back after the sale’s result was published.

Germany sold 3.198 million spot units for €8.06 each, some 2 cents below market at the time the auction’s bidding window closed.

The sale attracted bids worth a total 7.13 million units from 15 participants, equivalent to a bid-to-cover ratio of 2.23 – the lowest since Aug. 7.

This week’s auctions saw a total 12.16 million units sold with an average oversubscription rate of 2.73, which was well below August’s mean of 3.51 but slightly above July’s average 2.58.

“With auction cover ratios this week similar to July’s, nothing so far indicates that September’s auction volumes will have a disproportionate effect on EUA prices,” Redshaw said, referring to bearish warnings from some market participants over the resumption of full-sized auctions from Sep. 1.

Fresh permit supply coming to market was slashed by more than half in August to account for lower seasonal demand.

“Next week will be a better indicator with a full five days of auctions, and any utility buying stored up from August likely to have been dealt with this week,” Redshaw added.

Governments are due to offload 11.95 million EUAs next week as well as 935,000 EU aviation allowances (EUAAs) on Sep. 9, before sale volumes rise to 15.08 million the following week – the most since the penultimate week of July.

Meanwhile, no CERs were traded on ICE on Friday, with the bellwether Dec-15 contract settling at 52 cents and posting a week-on-week rise of 1 cent.

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

01/09/2015          EU          2,918,000             €7.98   +€0.00             3.12
02/09/2015          UK          3,123,000            €8.00   -€0.03             2.90
03/09/2015          EU          2,918,000             €8.06   -€0.04             2.69
04/09/2015          DE          3,198,000             €8.06   -€0.02             2.23

And next week’s scheduled sales:

07/09/2015          EU          2,918,000
08/09/2015          EU          2.918,000
09/09/2015          EU            935,000 EUAAs
10/09/2015           EU          2,918,000
11/09/2015           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 1.350% 1.052% 1.181% 1.300% 2016 €4.10/MWh -0.02
Dec-15 0.988% 1.166% 1.295% 2017 €3.22/MWh +0.02
Dec-16 1.345% 1.460% 2018 €3.14/MWh -0.07
Dec-17 1.568% (based on 36% efficiency factor)
(does not include transaction costs)


By Mike Szabo –