LONDON: European carbon prices closed 2.8 percent higher on Friday on speculative buying, rebounding from a three-week low touched earlier in the day.
Front-year EU Allowance futures, trading on ICE, closed up 17 cents at a session high 6.30 euros/tonne, erasing earlier losses that saw the contract trade as low as 6.06 euros.
Traders said Friday's gains were fuelled by short covering, as well as buying by some market participants looking for yield. Healthy liquidity across the EUA futures curve has made the EU Emissions Trading System a magnet for banks and other companies looking for decent low-risk returns.
Traders can execute the EUA carry trade, buying the spot or front-year contract and selling the further out futures, to capture annualised yields currently sitting around at least 2 percent.
While these returns are low in historic terms, they have become more attractive following the European Central Bank's surprise cuts to its interest and deposit rates on Thursday.
"It now makes more sense to shelter money in a more profitable market like carbon, so some speculators are presaging the inevitable arrival of more cash," said Louis Redshaw, head of London-based carbon market advisory firm Redshaw Advisors.
Spreads between the ICE December 2014 EUA and the further out contracts have narrowed to 15-month lows, underlining increased interest in the carry trade.
The narrowing spreads also suggest reduced demand from utilities, who are typically the main buyers of allowances for delivery several years from now.
While erasing most of Thursday's 3.3 percent loss, Friday's gains were not enough to allow a weekly rise for the Dec-14 futures, which are down 1.7 percent from last Friday's settlement.
EUAs suffered three consecutive days of losses this week in sympathy with falling energy market prices, which dipped on renewed hopes of a resolution to the Ukraine crisis.
On Sept. 8, officials from all 28 EU member states gather in Brussels to resume talks on a proposed market stability reserve, which analysts say could add 11 euros to permit prices by setting aside hundreds of millions of surplus allowances.
Germany wants the reserve to start in 2017, four years earlier than proposed by the European Commission, but no other nation has formally backed the earlier start.
Britain, previously one of the main proponents of reforms, will not come up with its position at the meeting, an environment ministry spokesman said by phone on Friday.
Party leaders in the European Parliament's environment committee on Wednesday agreed to hold a workshop on the reform on Nov. 5, a parliament spokesman told Reuters.
Ivo Belet, the Belgian MEP steering the proposal through the parliament, is in the next two weeks expected to confirm when his initial evaluation of the bill will be published.
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