EU Carbon Allowances Drop to Two-Year Low as Supplies to Rise

  • Auction held Friday included demand seen as surprisingly low
  • Options trades on Wednesday signaled potential decline

European Union carbon allowances fell to their lowest level in more than two years after an auction by Germany indicated weak demand before supply increases starting next week.

Friday’s sale of 3.5 million metric tons of allowances by the European Energy Exchange AG in Leipzig, Germany, had a cover ratio of 1.4 times, the lowest since July 8. The weak demand in this week’s only auction was surprising and drove prices to less than this year’s low, spurring even more declines as traders sought to stop losses, said Bernadett Papp, an analyst at Vertis Environmental Finance Ltd. in Budapest.

“If 3.5 million tons of allowances can cause such a decline, what will 18 million tons next week do?” Papp said by e-mail. “We knew that the cover ratio would be critical, but I think nobody expected it to be this low.”

EU nations seek to prevent reduced trading during August summer holidays from damping carbon prices by cutting supply in almost-daily auctions by about half. Prices rose less than 1 percent last month and aggregate trading volume dropped to the lowest level in seven years. The decade-old market has an accumulated glut equivalent to a full year of supply.

Benchmark December allowances dropped as much as 11 percent to 3.89 euros ($4.35) a ton, the lowest since March 2014, before recovering to 4.07 euros by 4:14 p.m. on ICE Futures Europe in London. The weekly decline of 14 percent would be the most since March 28, 2014.

“There was buying interest at and around 4 euros,” Louis Redshaw, founder of Redshaw Advisors in London, which buys carbon for clients, said by phone. “It’s not obvious that it goes down materially after today’s drop, but I think we see a grind lower over the next two years, subject to a freezing winter. There’s no good policy news expected in that period.”

Options trades earlier this week signaled a potential decline. On Wednesday, record volumes of options to sell at 3 euros and 4 euros cleared on ICE.