Analysis: CO2 market upswing sees CER prices lag behind
The recent upward trend on EU emission allowances (EUAs) and a spate of heavy selling on certified emission reductions (CERs) has blown out the spread between these contracts.
The usual premium of EUAs over CERs for December 2012 delivery jumped €0.50 per tonne of carbon dioxide equivalent (tCO2e), from €3.75/tCO2e on Thursday to €4.25/tCO2e on Friday, an increase of 13%. The premium has steadily widened from below €3.00/tCO2e since the start of this month.
Factors driving the spread
Market opinion was divided on why the premium had widened, or why CERs were being sold off. The trend accelerated when EUAs surged above €8.00/tCO2e on Friday while CERs lagged behind.
"There is a lot of selling [of CERs] at €4.00/tCO2e and, with EUAs supported, the spread blows out. It's very curious," one trader said Friday, adding that the narrow spread between spot and front year on CERs made it less attractive for him to take a position on.
"There is some aggressive CER selling, mainly on ICE," a second trader said Friday.
"If you sell CERs and buy EUAs it's a bullish move. You profit if [EUAs] go up and there is demand on both, so I think it must be people getting out of their CER positions," the second trader added.
Utilities that had been buying CERs for compliance purposes before Christmas are now out of the market, a third trader said.
"At the end of last year, they were buying CERs as a preference to EUAs. Compliance buying is all but finished now so demand for CERs is gone. There is a proportionate rise in EUAs," the third trader said.
A further round of compliance buying on spot CERs is likely to happen later this year, the first trader said, which could see the premium narrow again.
The wide spread may also correct when the market comes to terms with the oversupply of EUAs, a fourth trader said.
"If you know the market is going to be oversupplied, which is a given, then CERs or EUAs should all go down to an option premium, to a euro. If I sell that spread now, I'm making €3.50. I do not understand it," the fourth trader said.
Support and the spread
Other traders thought the increasing spread was not particularly noteworthy, saying that this always happened when carbon prices began an upward trajectory.
However, a comparison with the last period of climbing carbon prices does not show the same rapid increase in the EUA/CER spread.
In the 20 trading sessions leading up to 16 March 2011, benchmark EUA prices rose by 16% and the premium of EUAs over CERs rose by 18%.
By contrast, in the 20 trading sessions leading up to 27 January 2012, benchmark EUA prices rose by 13%, but the premium of the front-year EUAs over CERs rose by 35%.
A comparison between spot CERs and benchmark EUAs over the past 20 sessions shows the same trend, with the EUA premium increasing by 30% from €3.10/tCO2e to €4.00/tCO2e. VF
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