Monday, September 18, 2017

EUA Dec17: Price might consolidate near 7 euro

Despite hitting the highest level in 2 years at 7.72 euro last week, the EUA Dec17 finished the week 1.7% lower in a weekly comparison. 
After the news from last weekend about MEPs planning measures to reduce the negative effects of Brexit on the carbon price, the EUA Dec17 opened in a positive mood on Monday. The first transaction of the day cleared at a 4 cents gap up from previous Friday’s settlement price. After hitting a new 2-year high at 7.20 euro, traders took profit and pushed the price below 7 euro, to a daily minimum of 6.71 euro. The price recovered slightly by the end of the day, but it remained below 7 euro and in the negative territory. 
Forecasts of abundant wind power supply, position reduction before key political events and profit taking from the recent rally pushed the price of the EUA Dec17 intraday 5% lower on Tuesday to hit a daily minimum at 6.52 euro. In the last two hours of trading, however, buyers returned to the market and lifted the price back to Monday’s closing levels. The benchmark contract settled with a marginal loss of 0.1%. The daily candle looked like a hammer trying to find a bottom. Opening and closing prices were close to each other, indicating that the price is looking for a direction. 
Supported by a strong energy mix (German front year power hit a new record), the benchmark carbon contract climbed continuously higher on Wednesday to hit a new 2.5 year high at 7.22 euro. Although the price fell back slightly by the end of the day, it still closed with a gain of 3.3%. 
EU legislators apparently are on the path to adopt reforms that make the EU ETS more effective and EUAs more expensive. The EUA Dec17 opened therefore with a 5 cents gap up on Thursday and jumped to a new 2 year high at 7.72 euro, a level not seen since January 2016. The price turned lower in the last hours of trading to close at 7.10 euro, flat to Wednesday (shooting star / gravestone candlestick). The traded volume of 30 million was the highest of the week. 
On Friday, the benchmark carbon contract seemed to have lost its steam. It opened 1 cent below Thursday's settlement and although it was able to close the gap, it slipped lower during the day to end the day with a loss of 2.1%.
At the end of the week we could see a correction starting in both German front year power and carbon. After being overbought for weeks, the relative strength index of these instruments returned to 70 again. (In the case of German front year power to 74.) 
The EUA Dec17 also returned below the upper Bollinger band. 
This week, the carbon market might take direction from the five auction results and the broader energy mix. This week some 22.6 million allowances will be offered, some 10.8% less than last week. Last week's volumes were increased by the cancelled auction 7 September, while this week only Monday's auction volume will be increased.
After last week's vote in the plenary of the European Parliament and the trilogue meeting about the reform of the EU ETS, this week the political agenda is more exciting from the macroeconomic perspective. The US Federal Reserve holds a rate setting meeting on Wednesday. Although no changes to the current interest rates are expected, the communication during the press conference later in the day might be decisive for the EUR / USD, if the Fed Chair Yellen hints on future policy tightening.
On Friday, UK PM May holds a speech about Brexit in Florence. The event is watched by the market as there has been no real progress in the negotiations until now.
And last but not least, Germany elects a new parliament on Sunday. Polls suggest that market shouldn't expect any major changes in the current composition of the parliament and the government, but investors might remain risk-off remembering the disappointment after the Brexit referendum and the US presidential elections.
All in all, we expect the carbon market to consolidate near the 7 euro level this week with a somewhat lower volatility than we saw in the last two weeks.

Source: Bloomberg, ICE

Monday, September 11, 2017

EUA Dec17: Investors focus on the trilogue negotiations Wednesday afternoon

The EUA Dec17 gained more than 1 euro in one week and hit an almost 2 year high on Friday. The benchmark carbon contract closed the week with a gain of more than 20%.
The EUA Dec17 started the week at the level it finished last week. Previous Friday’s minimum at 5.82 euro proved a good support, because after hitting it in the morning, the price climbed higher continuously during the day to hit a daily maximum at 5.95 euro. The carbon market received support from higher power prices and improving profitability of coal fired power plants. The news about Germany and France pushing for a quick consensus about the reform of the ETS had a positive effect as well. The closing price of 5.92 euro represented a gain of 1.5% from last Friday.
The EUA Dec17 gained almost 10% on Tuesday, rallying from a daily minimum of 5.91 euro to a new 8-month high at 6.53 euro. The jump came as a surprise for most of the market participants who expected the price to drop considering previous week’s correction and the increasing auction volumes. Those who saw the price falling last week of August, either sold their allowances or they even went short. When the price started increasing, all these market participants were caught by surprise. Those who sold below 6 euro, bought back the allowances to sell them at a higher price. And those who opened short positions, saw their stop loss orders triggered. The traded volume in the Dec17 contract reached 18.9 million versus the 7 million on Monday and the August daily average volume of 9.7 million.
The EUA Dec17 was unstoppable on Wednesday again and expanded its gains by more than 3%. The price hit a daily maximum at 6.93 euro, a level not seen since April 2016. Market participants got more optimistic about the success of negotiations and lifted the price to new local highs.
On Thursday, the benchmark carbon contract started with a consolidation after the rally of the previous days. It opened 4 cents above Wednesday’s settlement price and even slipped to a daily minimum of 6.64 euro when the auction was cancelled on EEX. In the afternoon, however, bulls invaded the trading floor again and lifted the price to a daily maximum of 7.02 euro.
The EUA Dec17 gained an additional 2.5% on Friday and was able to close above the 7 euro level since January 2016.
Last week's rally lifted the RSI of the EUA Dec17 into overbought territory (again), but market participants do not seem to care. 
The question is what is really behind the price jump, the restart of political negotiations or the strong energy mix (the price of front year German power hit a 3.5-year high on Friday). 
If traders take profit after the trilogue negotiations this Wednesday, it becomes clear that speculation on political discussions lifted the price. Representatives of the EU member states meet MEPs Wednesday late afternoon to discuss the reform of the EU ETS. Based on the information market received about behind closed doors discussions last week positions came closer, but they are still distant on the triangle of issues (ambition, auction share and funds). Signs of a smooth agreement on an ambitious reform package could lift the EUA price, but further delays and / or no signs of ambition could hurt the price.
If, however, the price advances further this week, there is a good chance that the appreciation is fundamentally driven. From the technical analysis' point of view there is no strong resistance until 8.49 euro (a local high from December 2015) from where the price started plummeting in January 2016.
The increased auction volume will make the job of bulls a little bit more difficult. Due to the cancelled auction last Thursday the daily volume of the EU auctions on EEX (Monday, Tuesday and Thursday) increases by 1 million units.

Source: Bloomberg, ICE

Monday, September 4, 2017

EUA Dec17: High auction volume will weigh on the price

As the seasonality charts of the EUA price suggested, the last week of August brought a correction to the market. Although in a monthly comparison the price gained 13.6%, in a weekly comparison it lost 4.1%.
After the previous week’s rally, some late coming buyers lifted the EUA Dec17 to 6.20 euro Monday morning, a level not seen since 2 January. The price was stable during the day as it received positive signals from the broad energy mix and was also supported by the lack of EUA auctions. In the last hour of trading market participants started to take profit and the price fell to a daily minimum of 6.08 euro, filling the gap from the morning. The traded volume of 2.5 million was the lowest in 2017. The price closed at 6.10 euro, just one cent above last Friday’s settlement.
The EUA Dec17 had a strong start to the day on Tuesday. It opened with a 3 cents gap up, and jumped to a daily maximum of 6.18 euro in the first hour of trading already. After the weak auction, the price turned down and slipped continuously to reach a daily minimum at 5.96 euro. Below 6 euro, however, buyers stepped in and lifted the price back to a closing price of 6.04 euro, which still represented a daily decline of 1.0%.
Although the benchmark contract opened with a 5 cents gap down at 5.99 euro on Wednesday, this remained the daily minimum as the price increased continuously during the day. The daily maximum was reached at 6.12 euro, but by the end of the day the price returned towards 6 euro and closed with a marginal loss of 1 cent (-0.2% d/d). The traded volume reached 10.6 million, the highest in the last four trading days.
On Thursday, the EUA Dec17 opened 1 cent below Wednesday’s settlement price and was slipping lower step by step during the day. In the afternoon, the price hit a daily minimum at 5.87 euro (just one cent above the Marubozu line), but it was able to climb back higher to finish at 5.94 euro (-1.5% d/d). The traded volume of 8 million was below the 10.6 million of Wednesday and the August average of 9.7 million.
The price remained relatively stable on Friday and traded between 5.90 and 6 euro, but the last hour of trading brought sellers to the market who pushed the price to a daily minimum at 5.84 euro (so the support at the Marubozu line was broken). The price settled at its daily (and weekly) minimum providing a negative signal for this week’s start. In addition, the MACD slipped below the signal curve on Friday.
This week might have a sleepy start due to the US holidays on Monday (Labour Day).
In the carbon market, traders will watch closely the auction results to see if the market is able to absorb 21.5 million allowances, 93% more than last week.
It will be also important to see, if the price of German power continues its movement downwards, because this might weigh on the carbon price as well. 
On the other hand, the if the correction in the price of coal continues, it can counterbalance the negative effect of lower power prices (at least partially) and provide some support to the EUA price. The spreads could be also affected by major movements in the EUR / USD, especially after the rate setting meeting and the press conference of the European Central Bank Thursday afternoon.
All in all, we expect the decline in the EUA price to continue this week, and the price to move between 5.50 and 6.00 euro.

Source: Bloomberg, ICE

Monday, August 28, 2017

EUA Dec17: Closing above 6 euro for the first time since January

Higher power prices and the improving German dark spread lifted the benchmark carbon contract by 4.6% last week.
The EUA Dec17 started the week with a gap down at 5.79 euro, but it managed to recover quickly and climbed to a daily maximum at 5.91 euro. A weak auction result and lower German power prices weighed on the carbon market in the afternoon and the price hit a daily minimum at 5.73 euro. The contract was not able to recover from these levels and finished at 5.75 euro, a loss of 1.2% from previous Friday’s settlement. After the volumes above 10 million we saw last week, the traded volume only reached 5.4 million. Thanks to the correction, the price returned in the zone between the two Bollinger bands and the relative strength index slipped below 70.
On Tuesday, the benchmark carbon contract moved in a range of 15 cents. The price was relatively stable in the morning and more volatile in the afternoon when it fell to a daily minimum (and 4-day low) of 5.66 euro. Higher power prices and the improving dark spread however lifted the price by the end of the day. The price finished the day with a gain of 0.5%.
Despite opening with a gap down on Wednesday, the EUA Dec17 climbed continuously higher as it received support from higher power prices and an improving German dark spread. After Reuters reported that EDF found unknown deviations in its nuclear power plants, the price hit a daily maximum at 5.98 euro in the afternoon, a new 5-month high. The contract remained stable until the end of the day and closed at 5.95 euro (+2.5% d/d). The traded volume reached 32 million due to rolling of positions to March and December 2018. Thanks to the rally, the price reached the upper Bollinger band again and the relative strength index stepped above 70.
Although many market participants considered the price of the EUA Dec17 overbought already, the price started rallying Thursday morning already. After reaching the local maximum at 6.02 euro, many stop-loss orders were triggered and the price jumped to a new local maximum at 6.11 euro first. Then the price returned to 6 euro, but a new rally started in the afternoon and lifted the price to 6.12 euro. From there the price was not able to increase any further and it fell back to below 5 euro late in the afternoon. The benchmark carbon contract finished the day at 5.95 euro, unchanged from Wednesday’s settlement price.
The EUA Dec17 opened with a 2 cents gap up on Friday. The price fell to a daily minimum at 5.93 euro, but recovered quickly and climbed higher continuously during the day. The price hit a daily maximum at 6.10 euro in the afternoon and kept gains by the time the market closed. The settlement price of 6.09 euro was 2.4% higher than on Thursday. Last Friday was the first time since 2 January that the EUA Dec17 closed above 6 euro. The traded volume of 6.8 million however was the second lowest of the week.
This week might have a quiet start due to the Summer Bank Holiday due to which there won't be any auction on EEX on Monday. 
There will be auctions from Tuesday to Friday however and the auction on Friday will offer more than 4 million allowances as the period of halved auction volumes ends. The German auction will be a test of the market, if it has enough appetite to absorb all the allowances.
Should power prices be able to increase further, their positive effect might counterbalance the increasing supply. 
On the other hand, based on the relative strength index both carbon and the German front year power price are overbought already. 
We therefore expect the price of the EUA Dec17 to remain in the increasing trend channel and probably to reach 6.30 euro, but the high auction volume and a possible correction in power prices might push the price below 6 euro again. On the other hand we do not expect the price to fall below 5.70 euro.

Source: Bloomberg, ICE

Monday, August 21, 2017

EUA Dec17: Power prices and auction result have still the biggest impact

The EUA Dec17 jumped to a new 5-month high last week and gained 8% as the announcement of the French nuclear safety authority about checking reactor components lifted French and  German power prices to multi-year highs.
The week started with a volatile trading. The EUA Dec17 ran from 5.32 euro to 5.46 euro in the first five minutes of trading on Monday. And when everybody thought that the contract has set the daily range already, the price jumped further to hit 5.53 euro, a level not seen since mid-July. For the rest of the day the price consolidated around 5.50 euro. The benchmark contract finished the day at 5.52 euro, a gain of 2.4%. The traded volume increased above 10 million, for the first time in August, but remained above 10 million for the rest of the week.
The lack of auction lifted the price of the benchmark carbon contract to a new 5-month high at 5.64 euro on Tuesday. The former resistance at 5.47 euro on the other hand proved a good support during the day. As the energy mix was not supportive at all, the EUA Dec17 was not able to maintain its gains and slipped back to the level it closed on Monday and finished the day with a marginal gain of 1 cent (+0.2% d/d) leaving a bearish shooting star candle stick.
The EUA Dec17 had a spectacular rally on Wednesday helped by a strong auction and higher German power prices. The price increased continuously during the day to hit 5.83 euro, a level not seen since March 2017. As the news about the review of the French nuclear reactors prevailed, the contract was able to keep almost all its gains by the end of the day and closed 4.9% above Tuesday’s settlement price.
The EUA Dec17 had another volatile start to the day on Thursday. After opening with a 3 cents gap up in the morning, the price plummeted quickly to a daily minimum at 5.70 euro. In less than 30 minutes the price then jumped to a daily (and 5-month) maximum at 5.96 euro, but consolidated in a range between 5.76 and 5.88 euro in the rest of the day. The contract finished at 5.81 euro, up 1 cent (+0.02%) from Wednesday’s settlement. The traded volume reached 12 million, above the August average, but below Wednesday’s 21 million. After the huge white candle on Wednesday, the price left a doji candle on Thursday that indicated hesitation of the market participants if the rally can continue. The RSI jumped above 70 and the price traded above the upper Bollinger band. Both these signals confirmed the possibility of a correction.
On Friday, the price was not able to hit any new high and the daily range of 15 cents was also narrower than the previous days. The EUA Dec17 was only able to post a marginal gain of 1 cent (+0.2%).
By the end of last week the price got heavily overbought. The relative strength index ended the week at 73 (textbooks on technical analysis agree that relative strength index values above 70 suggest that the instrument is overbought) and the price of the benchmark carbon contract closed at the upper Bollinger band (at 5.82 euro). 
Also the positive effect of the news about the review of the French nuclear power plants vanished somewhat as in the beginning only documentation will be checked and the authority did not order the closure of the plants.
Market participants will keep an eye on further news about the French nuclears and on power prices (both in France and Germany). 
The second most important factor impacting carbon prices will be auction results this week. In five auctions some 10.8 million allowances will be offered, 20.6% more than last week. Next Friday, 1 September however auction volumes will get back to normal and market participants might start pricing this in already.
All in all, we expect the price of the EUA Dec17 to consolidate between 5.50 and 6.00 euro this week.

 Source: Bloomberg, ICE