EU Carbon Allowances Have Biggest Weekly Gain for Two Months

  • Options trading rises to the most since week ended July 1
  • German auction of allowances had price above market level

European Union carbon allowances had their biggest weekly gain since July 15 as auctions signaled strengthening demand and U.K. natural gas advanced.

December allowances climbed 6.9 percent week on week as U.K. natural gas for next summer rose 2.9 percent after three consecutive drops. Utilities burning the fuel need about half the allowances compared with those using coal. A sale of spot allowances Friday with a settlement price above the market by Germany had a cover ratio of 2.6 times, the highest since Sept. 8, according to data from the European Energy Exchange AG in Leipzig, Germany.

Allowances have still plunged more than 47 percent this year amid lawmaker efforts to deal with an accumulated glut that’s reached the equivalent of a full year of supply. The biggest risk to the program is that the U.K., the region’s second-biggest economy, will decide to abandon it after deciding June 23 to leave the EU, according to Energy Aspects Ltd. in London, which provides research.

Last week traders were “contemplating that the market might fall significantly further,” said Nigel Felgate, owner of Commodity Options Ltd. in London, England. This week traders were “waiting for an idea of direction.”

On Thursday, they got it. Allowances rose 4 percent and another 5.3 percent on Friday. U.K. summer gas gained 1.8 percent on Thursday, the most since July 15, after the Netherlands approved a lower production limit.

Carbon settled at 4.36 euros ($4.86) a metric ton on ICE Futures Europe in London Friday. The sale price in the German auction on EEX was 4.26 euros, 2 cents more than the prevailing market price on ICE for December allowances.

Options traders are signaling there’s some risk of more declines in allowances.

On Tuesday, a record 600,000 tons of the option to sell December carbon at 2 euros a ton cleared on ICE. The total volume of options contracts rose to the most since July 1 this week.

Trading in put options, which give the right to sell but not the obligation, is higher than usual as some traders buy downside protection, while others buy puts in the hope they will jump in price should futures drop further, Felgate said.

    Before it's here, it's on the Bloomberg Terminal.