Commodities Now, London, 24 June 2011

European carbon tumbled 11 per cent to its lowest level in more than two years on Friday amid heavy liquidation of long positions and automatic selling by banks. The ICE ECX December 2011 EUA finished €1.02 lower at €12.35, down 7.6 per cent from its finish on Thursday, after recovering from a 26-month low of €11.85 hit earlier in the session.

Selling was aggressive as the contract fell €1.50 in just 40 minutes of afternoon trade, a move that left the relative strength index, a measure of how much a contract is oversold or overbought, at a record low of 8.7.

"There is a massive number of people hitting stops,” one trader said, referring to automatic selling when prices hit low levels. “This has flushed everything out."

Market participants blamed the fall on the prospect of fresh supply, limited utility buying and waning confidence that EU bureaucrats will intervene to keep carbon prices high should emissions fall.

“There are a number of dynamics, there’s a feeling that the EC (European commission) isn’t as committed to carbon trading as in the past and is looking at (energy efficiency) legislation to reduce emissions instead,” one trader said.

Analysts were gloomy. Deutsche Bank in a report published on Friday warned “of clear risk of prices falling further”, while French bank Societe Generale admitted “it is hard to know where prices could stop as there is very little in the way of fundamentals to hold them”.

On Thursday Barclays Capital said there was little room for upside for the rest of the year.

But one carbon trader at a large European utility said: “We are buying every day so I don’t know why people are saying there is no utility buying”.

Crude oil was $3.60/ bbl down on its level when carbon closed on Thursday and was at $104.36/bbl by 1615 GMT, applying further pressure to carbon.

However, the German 2012 power contract on exchange EEX was largely unchanged at €56.85/MWh, leaving the year ahead clean-adjusted German dark spread at a 14-month high of €9/MWh.

But while EUAs slumped, CERs proved more resilient, ending the day at €10.28, down just 17 cents on Thursday, narrowing the spread between the two contracts to €2.26, its lowest level in 14 months.
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