Weekly carbon trading market update
Market developments:
- EUA prices fall more than €1.50
- Looming auction resumption weighs heavily on the market
- Price falls below €5 on Friday before recovering to end the week at €5.05, a fall of 23%
- EUAs now trading near the same level as before the auction shutdown
- Power price sees large falls, denting clean dark spread returns
EU Allowance Auction Overview
- The first 2017 auction is on 9th January in a big week that brings ~22.4Mt to market
- December 14th failed UK auction volume will be split across the first 4 UK auctions in 2017, taking the volume in each auction to ~5.14Mt from ~4.27Mt previously
- See auction table below for more details.
EUA Price Action
Much of the uptick in carbon prices over the holiday period was reversed last week as prices plummeted by more than €1.50. In our previous weekly update we highlighted the bearish pressure the looming auction resumption was likely to exert on EUA trading. Carbon prices ended the week at €5.05, a fall of more than 23%. Wednesday was the only day to provide some brief respite from the price falls as prices climbed 21c on the day however it was largely one-way traffic as the high of the week traded on Monday and the low of the week on Friday. The size of the falls are perhaps a little surprising given the cold weather sweeping over Europe. This should ordinarily provide some support, especially as the auctions did not resume until today (9th January). Carbon prices have now returned to pre-auction shutdown levels suggesting that the primary driver upwards and subsequent falls was speculator’s taking advantage of thin emissions trading markets to push the market around. It is no coincidence that emissions trading volume and price drops accelerated on 1st January, when traders’ books are reset and they are happy to take more risk again (and that risk appetite will favour the downside this year). Elsewhere, large falls in power prices dented clean dark spread returns as coal prices faired a little better through the week. Most of the figures emerging suggest coal burn through 2016 will be significantly down with gas burn the main winner. Price Impact: The dramatic price rises before Christmas and the falls again afterwards suggest fundamentals were not in charge of the market. With speculators trading short and the weather cold we don’t expect the higher auction volumes to move prices down much further. There is a small risk of a moderate price bounce until the weather reverts to normal and / or the shorts are closed out.
Week ahead
The first week of auctions brings more than 22Mt to market with 5 full auctions. The ability of the carbon market to cope with the volume, some 5Mt higher than a full week in 2016, remains to be seen. With any length built up before the Christmas auction shutdown now washed out by recent price action there is less reason for further substantial falls but much may depend on the auction results. Clearing prices significantly lower than market level or low cover ratios will tell us the markets cannot cope with the increased volume and will pre-sage more price weakness. Cold weather should provide support and keep utilities interested and the new year will bring out additional compliance buying as the once-a-year industrial purchasers look to cover their shortfall ahead of compliance in April. Overall a bit of a wait and see approach to this week so we maintain a neutral outlook with a chance of volatility.
