By Mathew Carr
EU allowances futures:
Dec. 8-9 2021 — LONDON: Carbon on Thursday more than gave up Wednesday’s gains.
This is in summary form because I’m still litigating.
The end of the rally?
Good story theme from Carbon Pulse may help explain today’s big drop…Possibly less demand from companies / banks using the carbon market for a kind of clever finance (paywall — Im trusting the top of the story, plus my gut …don’t trade solely off my comments on it):
Section from Carbon Pulse website:
ANALYSIS: EU ETS allocation adjustment rules put “borrow” trade at risk -analysts…Carbon Pulse– See Link in Tweet Above and Immediately above
New procedures to calculate the allocation of free EUAs to industry may lead to delays in handing out allowances each year, putting at risk a trading strategy that has allowed industrial companies to raise cash during economic downturns, analysts say.
Here’s a Redshaw Advisors note, Wednesday night London time, about Wednesday’s gain (please do your own analysis before trading):
Price Action: The EUA price continued to spiral higher today, posting a huge €4.19 (4.9%) gain with the energy complex providing tailwinds again. It was one-way traffic higher with gains from the off, culminating in another fresh all-time high at €90.75 mid-way through the afternoon. The price did soften slightly into the close to end the day at €89.60, but at present it looks nothing more than some profit taking having hit another round figure. The gains continue to be driven by a cocktail of bullish fundamental drivers with cold weather, profitable clean dark spreads, energy complex gains and the auction shutdown looming. In addition, the hedging requirements of the call option sellers at strike prices above current levels will be adding to the buying frenzy as they look to cover their growing exposure as the price rises, creating a self-fulfilling element to the gains.
Outlook: With significant call option open interest at the €100 strike price, further gains and prices of €100 or more ahead of the options expiry next Wednesday certainly cannot be ruled out. If the option hedging requirements outweigh the available auction supply the gains become almost inevitable with few traders willing to bet against further gains. However, the market is trading long which makes a sizeable reversal a very real possibility but calling the trigger, timing or point from which the price reverses is impossible to predict. For now, the outlook in the short-term remains bullish with few signs of any weariness in the relentless bull run.
EUA Closing price: €89.60
Average closing price – last 20 trading days: €73.41
Average closing price – 2021: €51.90
(Updates with a little from Thursday)