(Updates with closing prices, analyst comment, corrects 2015 auction coverage average in penultimate paragraph)

EU carbon prices dropped back below €6 on Monday to hit a 20-month low, wiping out late last week’s ‘relief rally’ that had given brief respite to this month’s steep losses.

The Dec-16 EUA futures on ICE fell to a session low of €5.72 before climbing back to settle at €5.91, a 45-cent or 7.1% daily loss.

Volume on the benchmark contract was very heavy at 29.3 million units including a rare 5 million gone EFP, in what was one of the busiest trading days seen so far this year.

The loss reversed the recovery posted late last week, when prices climbed back from their previous low of €6.87 touched on Thursday to hit an intraday high of €6.55 on Friday, before settling at €6.36 – a weekly loss of 5.4%.

Near-term German baseload power prices sank back on Monday as forecasts for a much warmer week cut demand to heat homes, putting pressure on prices further along the curve.

Next-year prices were down as much as 90 cents or 3.8% at €22.90/MWh on EEX, pushing the key electricity benchmark near last week’s record low of €22.75 and dampening the signal for utilities to buy carbon.

“The weather is not giving much support, but already on Friday [EUAs] didn’t look too strong,” said one trader, referring to a late sell-off that pushed carbon back below €6.50.

Despite weaker power, the German clean dark spreads were little changed as they were supported by lower coal and carbon and a slightly stronger euro.

Meanwhile, crude oil prices fell 3% on concerns over the global oversupply after Iraq announced record-high oil production.

Carbon prices have fallen some 30% since the end of 2015 in what many attribute to speculators short-selling amid weak energy markets that has deterred utility buyers, though some market participants have said the drop has been exacerbated by a few big industrial companies dumping spare allowances to raise cash.

“Despite further gains to a high of €6.55, price action Friday did not create a compelling story for further gains … This would suggest there is still some sizeable selling activity present in the market and a reluctance by participants to close shorts or open long positions to counter it,” said traders Redshaw Advisors in a weekly note to clients on Monday.

“Until the selling pressure eases and the market is able to show some decent signs of recovery any participants calling a recovery will have been burnt several times already so will act nervously and in small size. Therefore, a material bounce seems less and less likely,” they added.

INDUSTRY SIGNALS

Jahn Olsen, a power and carbon analyst at Bloomberg New Energy Finance, also had doubts that carbon was due a rapid rebound, though he did expect prices to turn upwards in the medium term.

“We don’t think EUAs will rebound quickly, if not in Q1 then Q2 we’ll start to see some recovery. Right now there are a lot of short positions being taken,” he said.

He said the bearish prognosis for many of the big emitting ETS-regulated companies – steel, cement, refineries – outweighed a more positive outlook across EU industry as a whole, which was reflected in an expansion of output in January’s eurozone Manufacturing Purchasing Managers Index.

“This might cause increased sales from companies looking to raise cash,” he added.

In 2015, the EU’s crude steel production fell 1.8% to 166.2 million tonnes, with output down 0.6% in steel powerhouse Germany, 10.4% in the UK, 7.1% in Italy and 7.2% in France, according to figures by the World Steel Association on Monday. Poland’s was up 6.4%, while Spanish output rose 4.4%.

Global steel production fell 2.8 %, with top producer China’s output falling 2.3%, though its share of world production nudged slightly higher to 49.5%, up from 49.3% in 2014.

NEUTRAL AUCTION

EUA futures were little moved following the EU’s sale of 3.425m spot EUAs, which cleared at €5.93, in line with the secondary market for prompt delivery. Bid coverage was 2.06, below the 2.36 average so far this year.

EUA auction supply this week swells by 25% to 17.3 million, up from last week’s 13.8 million due to Wednesday’s UK sale replacing a rare EUAA auction.

This week’s scheduled EUA sales:

By Ben Garside – ben@carbon-pulse.com