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Looming CO2 data could push carbon under €5/tCO2e

20 Mar 2014 13:27:46 | edcm

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The rise in speculative positions around the advent of back-loading could see carbon prices plunge rapidly if 2013 emissions figures, due next month, come in lower than expected, traders have warned.

While lower-than expected auction results have repeatedly put downward pressure on carbon prices over recent sessions, some of the bearishness may have been offset by sturdy demand in the run up to compliance. The EU allowance (EUA) benchmark contract has headed south from seven euros, steadily towards six euros, since 7 March. Since the start of this week, on 17 March, it has closed in a tight €5.95-6.10/tCO2e range.

If the contract fails to break away higher it could exacerbate potential bearish factors looming ahead of the market over the coming month.

Falling down

Carbon prices could fall lower once the market has digested the start of back-loading and the compliance deadline of 1 April has passed. This is because ‘seasonal’ demand on the carbon market will evaporate again, post-compliance.

Furthermore, if emissions verification data for 2013 is confirmed as lower than expected at the start of April, this will heap more bearish pressure onto prices.

One trader labelled the verification numbers as a “major hurdle”. Another agreed, saying: “if [the verification figures] come in weaker [than expected], we could see €4.80/tCO2e again, once compliance is over.” The last time the EUA benchmark closed at this price was in mid-January, when it finished at €4.85/tCO2e, ICIS data shows.

Concern that the verification figures may come out on the low side is being fuelled by the combination of an “exceptionally warm” winter and a “rake of bad” utility results, a third source said.

Germany’s largest utility RWE, for instance, reported a 9% fall in emissions earlier this month ( see EDCM 4 March 2014 ). Similarly, competitor E.ON also reported a 9% emissions decline for 2013 last week, as well as a 34% drop in traded emission certificates over the same period ( see EDCM 12 March 2014 ).

This news depressed the carbon price, as German utilities are considered buyers in the market.

Any more bearish news, such as disappointing verification figures, could spark another round of selling, traders suggested, as back-loading had attracted speculative positions to the market only weeks ahead of the compliance deadline.

Volatility

Over the past fortnight, price moves have been “exacerbated by people looking for a move”, the first trader said. “There is a lot of interest in the market at the moment, there are market makers out there and individuals taking positions,” the trader pointed out. “There was a lot of activity around the expected rise in carbon, some of that speculative, people are now getting out of their positions and we are getting exaggerated moves in the market,” he added.

The second source agreed, saying that the speculative interest ahead of compliance had turned the EU emission trading system into a “scary market”. He pointed out that while there had been little change in the fundamentals of the market, it had gone through a volatile period. “There are a lot of guys that put very, very big bets on [a stronger carbon price] ,” he said, adding that they would not necessarily stick around for a higher carbon price once back-loading intensifies. “It is about making money,” he said.

A third trader described trying to keep up with the rapid sell offs that have plagued sessions at the slightest indication of a bearish signal, such as disappointing auction results, like “catching a falling knife”. Low verification numbers could have a similar impact.

The European Commission is expected to publish the annual emissions data for CO2 reported and verified on 1 April, though it has been known to make it available earlier in previous years. Marie-Louise du Bois

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