EU Carbon Trades Near Three-Year Low as Natural Gas Declines

  • Volume of options to sell signals that traders seek protection
  • Increased supply at auctions was met with higher demand

European Union carbon allowances traded near their lowest in three years as falling natural gas prices made the cleaner-burning fuel more profitable for power utilities.

The permits pared the worst of the week’s losses after an increase in supply in five auctions was met with higher demand. The volume of options to sell carbon allowances on ICE Futures Europe in each of the past two weeks was higher than any week since July 1, reinforcing the bearish mood.

Lower gas costs have helped create demand for options to sell carbon allowances, as traders seek to protect themselves against further declines, said Trevor Sikorski, an analyst in London with Energy Aspects Ltd. “It’s characteristic of the market that’s particularly bearish,” Sikorski said by phone.

Carbon settled at the lowest price since May 2013 on Monday. Sikorski forecasts that the volume of emissions covered by the market will drop 4.3 percent next year, as utilities use more gas. Meanwhile, supplies auctioned and handed out by nations will rise 11 percent. The market already has a glut the size of a full year of allowances.

U.K. natural gas for summer dropped 2.4 percent week on week, its third consecutive decline. Utilities burning the fuel need about half the emission allowances compared with those using coal.

December allowances were little changed Friday at 4.07 euros ($4.56) a metric ton on ICE at 4:14 p.m., 1 cent less than last week’s close. They settled at 3.93 euros on Monday.

A record 500,000 tons of the option to sell December allowances at 2 euros changed hands on Thursday, according to ICE data. The volume of options to sell carbon this week was 6.2 million tons, versus 6.6 million tons of options to buy.

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