European carbon prices climbed for the third consecutive session on Tuesday, topping €8.60 in defiance of a bearish energy complex as surging coal prices cut utility margins.

The Dec-15 EUAs settled up 8 cents at €8.61, near the top of the day’s €8.48-8.62 range and on steady volume of 13.6 million units, following a rally in the last 90 minutes of trade.

Trade was brisk down the rest of the curve, with most of the 7.1 million in volume done on the Dec-16s and 17s coming as time spreads.

The day’s peak was the highest the front-year futures have seen for two weeks and takes the contract back within reach of its 3-year high of €8.71 reached on Oct. 29.

The day’s trade appeared to include a spot-Dec16 CER spread play of 509,000 units at the front end of the steeply backwardated futures curve.  The move may have locked in as much as a 10-cent spread, which would translate into a return of at least 15% based on the 56-cent Dec-16s.

Meanwhile, German clean dark spreads returned to their recent downward trajectory, wiping out the previous session’s gains that had briefly lifted the Calendar 2017 and 2018 vintages from seven-month lows touched last week.

This was mainly due to a 60-cent jump in dollar-denominated coal prices, an increase made more costly for European utilities after the euro slipped following a rise in US inflation, which reinforced expectations the the Federal Reserve will raise interest rates next month.

Analysts at Energy Aspects don’t expect prices to continue to rally for the rest of the month due to continued high auction supply and bearish dark spreads.

“We do not see prices moving far from the €8.50 level over this period,” they wrote in a weekly note.

Earlier today, the EU’s sale of 2.9 million spot EUAs cleared at €8.49, a cent below market and with bid coverage of 2.73.

Tomorrow, a rare Polish afternoon sale of 2.856 million spot units replaces the UK’s fortnightly auction.

By Ben Garside – ben@carbon-pulse.com