Cold weather and carbon auction cut needed to test 2015 EUA high

European carbon prices are unlikely to breach the 2015 high by the end of the year without significant aid from colder weather and auction supply cuts, according to market participants.

The December ’15 EU emissions allowance (EUA) contract hit a three-year high of €8.71/tCO2e on 29 October, according to platform ICE Futures Europe. But prices have been stuck in a narrow range since mid-November and have consistently closed a few cents short of the peak.

A supportive factor for prices going forward could be the three-week halt to EUA auction supply starting on 18 December. The pause is to account for lower demand during the festive winter period.

“One can only bet on the absence of auctions,” an analyst at a trading house said last week. “If someone gets an appetite and buys, then that could push new highs.”

EUA prices have historically risen in December amid the dearth of auctions. Looking at the previous three years, the benchmark contract rose on average by 14% from the start of December to the monthly peak, which was typically hit within a few days of Christmas day.

However, whether EUAs can head up to break the 2015 high is uncertain. “I’m not so sure,” a trader at a utility said last week. ”It’s not moving at all.”

Little energy sector support

The wider energy complex has helped support EUA prices over the past few weeks. European power prices are in a long-term down-trend, although there has been a slight retracement up since mid-November.

EUA prices can track movement on power contracts – particularly the German front year product – because utilities often simultaneously buy EUAs to cover the pollution associated with generation each time electricity is sold forward.

But whether the energy complex can offer further support to EUAs is unlikely at present. Temperatures in Europe are forecast to be mild as December continues, which will depress heating demand from the energy sector. Furthermore, oil prices, a key price setter in the energy sphere, are expected to be weak with the market oversupplied.

A cold snap could change this picture and instead cause prices to rise, but this will require a significant change from current conditions.

Auction cut

Whether there will otherwise be late demand this month remains to be seen.

“Normally when auctions end, so does demand,” one trader at an energy company said on Friday.

Volatility lessened during the Christmas break last year, with many traders away from their desks. The benchmark EUA had an average daily traded range of €0.15/tCO2e during the supply cut, compared to €0.23/tCO2e over the rest of the year.

The December ’15 contract was trading at around €8.45/tCO2e at 14:30 London time. “Should declining auction volumes support the price … it [the December ’15 EUA] has to break above €8.50/tCO2e first to be able to re-test the 2015 high,” Hungary-based trading house Vertis said in a blog on Monday.

Six analysts polled by ICIS in September said EUA prices would average €8.50/tCO2e in the final quarter of 2015.

Although prices rose during the previous three auction cuts, there was a retracement down in the first week of January in anticipation of the return of supply. ben.lee@icis.com