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Analysis: EUA oversupply to bite if back-loading stalls

22 Oct 2013 18:38:41 | edcm

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The rise in carbon prices last week on the back of confidence the back-loading proposal would progress has been eroded, and losses could continue as fundamentals come back to the spotlight, analysts said.

In week 42 the benchmark EUA December ‘13 interrupted a downward trend as comments from German officials – first acting environment minister Peter Altmaier and then chancellor Angela Merkel ( see EDCM 18 October 2013 ) – raised expectations the country’s stance on the back-loading proposal would be finalised soon, paving the way for trialogue negotiations among the European Parliament, Council and Commission to formally start. However, the trend reversed as traders re-weighed Merkel’s comments against the oversupply in the market.

Some 100m allowances will be sold by the European Investment Bank (EIB) starting from mid-November over a five-month period, and auction supply is already at a record high in the fourth quarter, as Poland is auctioning its whole 2013 allowance pot between September and December.

And additional supply might come to the market in the shape of surplus sales from industrials with long carbon positions once they receive their 2013 allocation – due by end of year – even though a heavy sell-off is not likely ( see EDCM 12 September 2013 ).

In early week 43 prices continued to shed the premium they accumulated the week before.

“The price of EU emission allowances has recently benefited from renewed optimism on the back-loading issue. However, it remains unclear whether the hopes for concrete progress in the coming weeks will be fulfilled. Without such progress, we think that the supply boost expected for the coming weeks... could push prices down to the €4.30/tonne of CO2 equivalent mark again,” bank Unicredit said in a note late on Monday.

Two carbon traders mentioned higher support levels at €4.50/tCO2e and €4.60/tCO2e. One source at a trading house said he does not expect carbon prices to get as low as €4.30/tCO2e in the short term.

Back-loading is also missing from the formal agenda of a key upcoming EU meeting. On Wednesday morning the Permanent Representatives Committee (Coreper I) – responsible for preparing the work of the Council and consisting of representatives from the different EU countries – will meet, chaired by the Lithuanian rotating presidency. In case nothing new on the back-loading proposal emerges after the meeting, slightly bearish sentiment could spread as traders might see this as a delay to implement it, said ICIS’ analytic firm Tschach Solutions on Tuesday.

While a vote on the back-loading is still technically possible in 2013 in case the legislative process goes forward quickly, the risk still exists that the European Parliament would leave it to the next parliament, according to a research note from carbon trading and consulting firm Virtuse Energy on Tuesday. Silvia Molteni

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