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EU CO2 prices fall back for third straight day, breaching Eur21.00/mt 'on profit-taking'

London — EU carbon dioxide allowance prices under the EU Emissions Trading System fell back sharply for a third straight day Thursday, on apparent profit-taking following Monday's surge to a 10-year high.

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EU Allowance futures contracts for December 2018 delivery on the ICE Futures Europe exchange fell as low as Eur20.67/mt Thursday, down Eur2.28/mt or 10% from Eur22.95/mt at the close Wednesday.

Prices surged to a 10-year intra-day high of Eur25.79/mt on Monday, up from a close of Eur20.18/mt on September 4.

The unusually sharp gains in the first few days of September may have given traders a reason to take profits, particularly given potentially bearish developments later this month.

Some participants have noted a squeeze on EUA options contracts which has recently compounded the price gains.

As carbon futures prices rose above call option strike prices in the first few days of September, sellers of those call options may have been forced to buy EUA futures contracts to hedge those sales.

This compounded the sharp rally earlier in September and may have left the EUA futures price open to downward pressure ahead of the expiry of September EUA call options on ICE on September 19.

S&P Global Platts Analytics also issued a monthly report Wednesday highlighting the risk of a downward correction for EUA prices, linked to potentially higher than normal winter temperatures or higher wind and nuclear generation, which would reduce EUA demand from the electricity generation sector.

Nevertheless, beyond short-term price dynamics, the long-term bullish trend for carbon prices is likely to continue, it said.

Fundamentals suggested "continued support for EUA ahead of 2019: strength in gas prices, and reduced EUA auction supply," it said.

The rapid price surge to 10-year highs, followed by sharp losses over the last three days, indicate the presence of speculative money in the market, particularly as underlying utility hedging demand indicators continue to send bullish signals in the forward power markets, with coal-fired profits in Germany widening their premium over equivalent gas-fired generation in August and September.

Of interest to the market now will be where underlying price support kicks back in, providing a measure of how much of the recent gains may have been linked to short-term speculative trading.

--Frank Watson, frank.watson@spglobal.com

--Edited by Maurice Geller, maurice.geller@spglobal.com