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EUAs buckle under UK auction pressure, reach parity with British units « Carbon Pulse

EUAs gave back early gains on Wednesday as the fortnightly UK auction again weighed on Europe’s carbon markets, with UK Allowances hitting a new low to trade at parity with their EU counterparts for the first time.
The Dec-21 EUA contract on ICE climbe…

EUAs gave back early gains on Wednesday as the fortnightly UK auction again weighed on Europe's carbon markets, with UK Allowances hitting a new low to trade at parity with their EU counterparts for the first time. The Dec-21 EUA contract on ICE climbed as much as EUR1.08 to EUR52.42 by early afternoon, but prices dropped more than 60 cents in the immediate aftermath of the British sale and failed to recover after that. The benchmark EU carbon contract eventually settled at EUR51.34 for a 6-cent daily loss, with volume a heavy 35.1 million and a further 8.7 mln traded on ICE's other EUA contracts.

ICE's Dec-21 UKAs eventually settled down 0.9% or 40p at GBP44.10 (EUR51.34), just off the day's bottom and a new record low of EUR44.00. Volume was busy 2.2 mln, with 1.8 mln of that done as block trades. "The UK auction is still having a considerable impact on EUA development, but the EU market is beginning to get used to it now," said one trader, reflecting on the declines of the two previous fortnightly sales.

While the EU and UK carbon markets are not linked, some British utilities are still thought to be selling EUAs bought previously as hedges as they replace those holdings with UK units. The sale for 6.052 mln spot UKAs cleared at GBP43.40 (EUR50.50), with total 16.5 Mt in total bids entered and only 1 of the 17 bidders not receiving units. That was a discount of GBP1.25 to the prevailing spot price in the secondary market when the 1100-1300 GMT bidding window closed.

As happened in the prior auction two weeks earlier, the front-year UKA futures tumbled by GBP1 immediately after the sale, falling some 19p below the previous session's all-time low. Bidding interest has declined from the first and second sales' respective 29.3 Mt and 22.1 Mt in orders. BRITISH PARITY

Today's moves put UKAs and EUAs at parity for the first time ever, with the UK permits having traded at a premium of above EUR6 just after the market's mid-May launch. Since Tuesday, the Dec-21 UKAs have traded below May's GBP44.74 Cost Containment Mechanism (CCM) trigger level. According to the market rules, the CCM will be activated in early August and supply-side intervention considered if the average monthly settlement price on the front-year futures in May, June, and July all exceed the May trigger.

The benchmark futures recorded an average settlement of GBP49.09 in May and they have notched a daily mean of GBP46.27 so far in June - both well above May's trigger point, which is the mean price over the two years up to the end of April. According to Carbon Pulse calculations, for the May trigger to be invalidated this month, the Dec-21s must settle at or below GBP42.90 for the remainder of June. "The Cost Containment Mechanism is likely to be triggered but that still leaves a lot of uncertainty because it is not at all clear what the government will decide to do in August," the trader added, referring to when officials would convene to discuss intervention.

"The market's main problem is liquidity. Things are improving with the spread to EUAs coming down, but everything is still based around the auctions." The government has several options for intervention - including bringing forward allowances from future years or from various reserves - but only if the price evolution is deemed not to correspond to changing market fundamentals.

LOSING BULLISHNESS? EUAs have fallen back since Monday's peak of EUR53.99, with traders largely attributing the shift to Germany's announcement that its industrial installations would receive a higher-than-expected 129 mln free EU carbon allowances annually over 2021-25. Despite several short-lived drops below EUR50 since hitting an all-time high EUR56.90 on May 14, carbon has consolidated in a EUR50-55 range.

"Daily volume since the beginning of June has been steadily declining, which confirms lack of directional buying/selling in comparison to May," said Jan Kresnik of traders Belektron, in a weekly emailed note. "As we are nearing option expiry next week, it is expected to see increased volatility in both directions," he added. Kresnik still gave a broadly positive outlook, pointing out that EUA prices were still in a long-term uptrend, with the Dec-21s 50- and 200- day moving averages - today around EUR49.95 and EUR36.75 respectively - continuing to climb and provide technical support.

"With the start of calendar summer and warmer weather in Central Europe, electricity demand will likely increase, which may have positive effect on EUAs for the next few months," he added. ENERGY, TECHNICALS The European energy complex appeared to react to the EUA moves today, with key power, gas, and coal contracts selling off in the afternoon to unwind earlier increases.

EEX's next-year baseload German power contract climbed as much as 1.2% to EUR66.06/MWh but was 10 cents into negative territory at EUR65.20 as carbon settled. ICE's front-month Dutch TTF gas contract rose as much as 2.6% to EUR28.85/MWh - topping Monday's multi-year high by 4 cents - but was later at EUR28.07 for a 0.2% daily loss. Its next-year ARA coal import contract lifted 1.5% to £82.60/tonne, but later slipped into the red and was trading 35 cents down at £81.00 as European markets wound down.

Meanwhile, technical analyst Clive Lambert of FuturesTechs lowered his short-term EUA outlook to 'neutral-bullish' from 'bullish' this morning, following drops of more than a euro on both Monday and Tuesday. "It is looking increasingly like the failure to 'crack on' after last week's buy signal is something to worry the ardent bulls," he said in a morning note, referring to last Wednesday's two-week high EUR54.19. He warned that if Tuesday's EUR51.05 low breaks, this would signal a move out of a bullish zone, with the next downside target EUR50.33, "and if this doesn't hold EUR48.61 could see a retest".

In the morning, EUA prices jumped some 20 cents in the aftermath of Poland's 0700-0900 GMT spot auction and kept rising steadily through to the UKA sale. The Polish sale cleared at a sizeable 8 cents below market at EUR50.83, extending the run of discounted daily EUA sales to four. Today's discount was less extreme than the 15-cent discounts recorded on Tuesday and Friday but still off the more average 4-cent differential seen on Monday.

As of the time of writing, ICE Futures Europe had not yet published a Commitment of Traders report for last week.  As well, the bourse cancelled data for the week ending June 4, which showed abnormally large and all but certainly incorrect futures holdings by one group of participants. Below is a summary of today's spot EUA and UKA auctions. For EUAs, the discount/premium reflects where the sale cleared in relation to the secondary spot market based on the last Dec-21 futures trade on ICE at the time the auction's bidding window closed.

Year-to-date (YTD) averages are across all EUA auctions.

Seller PL
Quantity 2.575M EUAs
Clearing price EUR50.83
Disc (-)/Prem (+) to spot (YTD avg) -0.08 (-0.06)
Bid coverage (YTD avg) 1.41 (1.66)
# of Bidders (YTD avg) 27 (25)
Bidder success rate (YTD avg) 74% (74%)
Clearing price-Mean bid (YTD avg) +0.25 (0.01)

By Ben Garside and Mike Szabo - [email protected]