Monday, October 16, 2017

EUA Dec17: MACD climbed above signal curve on week of trilogue

Expectations about and results of the trilogue negotiations about the reform of the EU ETS kept the price of the EUA Dec17 in motion last week.

The benchmark carbon contract opened with a 5 cents gap up from previous Friday’s settlement price on Monday. The weak energy mix and the uncertainty about the trilogue however pushed the price to a daily minimum of 6.83 euro, but the strong auction and confirmation of Mrs. Girling as ETS rapporteur reversed the price that hit a daily maximum at 7.07 euro. By the end of the day the negative effect of the energy mix proved stronger and the contract closed with a loss of 4 cents (-0.6%). 

On Tuesday, the EUA Dec17 opened with a 3 cents gap down and slipped to an intraday minimum at 6.89 euro. The price started increasing before noon, and started a real rally when it reached the 7.05 euro level. Although the rest of the energy mix remained calm, the EUA Dec17 hit a daily maximum at 7.32 euro, a level not seen since 29 September. In the last hour of trading, the price stabilized between 7.27 and 7.32 euro and closed at 7.39 euro, a gain of 43 cents (+6.2%). 

On Wednesday, the EUA Dec17 started the day in a positive mood and with a 4 cents gap up. Higher power prices and optimism about the outcome of the trilogue meeting lifted the price to an intraday maximum at 7.54 euro, a level not seen since 14 September when the price reached 7.72 euro. In the last hour of trading, however, traders took their profit from the recent short rally. The price closed at 7.38 euro (the upper Bollinger band exactly), a marginal loss of 1 cent from Tuesday.

On the day of the fifth trilogue meeting, the benchmark carbon market had a volatile day. It opened with a 3 cents gap down, but was stable in the morning hours between 7.30 and 7.40 euro. Approximately at the time of the start of the trilogue meeting, the price started to fall sharply and hit a daily minimum at 7.20 euro. The reversal was even sharper, as the contract jumped almost 40 cents to hit a new October high at 7.59 euro. In the last two hours of trading the price lost 20 cents from its daily high and closed at 7.41 euro, a gain of 0.4% in a daily comparison. The rally on Tuesday and the jump on Thursday lifted the MACD above the signal curve, a positive sign.

The disappointment about Thursday’s trilogue not being the last one, pushed the price down in Friday’s opening already (16 cents gap down). The contract finished the day with a loss of 1.2%, but in a weekly comparison, the price gained almost 5% and the traded volume increased by almost 30% week on week.

After last week's volatility because of the trilogue, we expect a more quiet week this time. Market participants are eager to know the date of the next trilogue about the reform of the EU ETS. Media sources reported last Friday that the date has been tentatively set for 8 November, meaning that it would take place during COP23, but there is still a chance to reach an agreement before the biggest international conference of climate change ends. According to the German environment ministry not more than one meeting is still necessary to agree on the different reform points.

On the other hand, deteriorating dark spread (the profitability of German coal fired power plants fell to 1.2 euro per megawatt hour from levels above 2 euro on expensive coal) and above the seasonal average temperatures might cap gains. Our base range for this week is 7.00 and 7.70 euro.

Source: Bloomberg, ICE

Monday, October 9, 2017

EUA Dec17: Growing uncertainties about this week's trilogue

With the next trilogue meeting approaching and market participants getting more cautious, the volatility in the carbon market decreased last week. Risk averse traders pushed the EUA Dec17 price down by 1%, but kept it very close to the psychologically important 7 euro level.

The EUA Dec17 started last week with a 5 cents gap up, but declined continuously from the opening level on the weak energy mix. The price hit a daily minimum at 6.83 euro (just 2 cents below the 20DMA that worked as a support in recent days) before returning to 6.94 euro. The contract lost 13 cents or 1.8% by the end of the day. The traded volume of 14.2 million remained well below the September average of 19.7 million. 

The EUA Dec17 started Tuesday in a negative mood opening 3 cents below Monday’s settlement. The price slipped to a daily minimum at 6.88 euro before reversing. The lack of auction and the higher power prices lifted the price back above 7 euro. After hitting a daily maximum at 7.13 euro, the price turned slightly lower to close the day at 7.00 euro, a gain of 6 cents or 0.9%. The traded volume of 7.7 million allowances reflected the public holiday in Germany. 

On Wednesday, the benchmark carbon contract fell 10 cents from previous day’s close and settled at 6.90 euro, at the lower end of the session’s trading range. Prices jumped to intraday high shortly after the auction and hovered around 7 euro until the last hour of trading when sellers pushed prices down. 

Despite the strong energy mix, the EUA Dec17 was not able to climb above 7 euro on Thursday. After opening with a 2 cents discount below Wednesday’s settlement price, the benchmark carbon contract declined continuously to hit a daily minimum at 6.79 euro, a level not seen for a week. Buyers then lifted the price in the afternoon back to 6.95 euro, but gains could not be kept and the price closed the day with a loss of 1 cent (-0.1%). 

The EUA Dec17  opened with a 4 cents discount on Friday. The price slipped to an intraday minimum at 6.77 euro before reversing and increasing to a maximum of 7.05 euro as coal prices fell and the German dark spread improved. The benchmark carbon contract closed the week at 7.00 euro exactly, representing a daily gain of 1.6%, but a weekly loss of 1%.

Although the 20DMA lost its role as support level last week, the gravity at 7 euro is still working properly and every time the price slips to 6.80 euro, buyers lift the price back towards the psychologically important level.

The most awaited event of this week will be the trilogue on Thursday, 12 October. EU ambassadors adopted a new mandate for the negotiations last Friday, allowing for the cancellation of allowances from the market stability reserve from 2023 on. This news could in theory increase the price of allowances, but there are still many topics where the preferences of the Council and the European Parliament differ decreasing the chances that this could be the last trilogue.

The fact that UK PM Theresa May suspended ETS rapporteur Julie Girling from the Tories this Sunday is complicating the situation further. It is still not clear how this will affect the ETS reform negotiations. Last time when Mrs. Girling was appointed to replace previous rapporteur Ian Duncan, the EU parliament reacted quickly, but it has to be seen if this will be the case this time as well. Still, this uncertainty might keep a cap on potential price gains.

Other factor weighing on the prices will be the auction volume increasing by almost 30% in a weekly comparison. (Last Tuesday was a bank holiday in Germany an d no auction took place on EEX.)

All in all, we remain cautious for this week and expect the price to move between 6.70 and 7.40 euro.

Source: Bloomberg, ICE

Monday, October 2, 2017

EUA Dec17: 20% less allowances to be auctioned this week

Helped by the improving German dark spread and optimism about the reform of the system, the EUA Dec17 gained more than 6% last week. 

The EUA Dec17 started the previous week with a spectacular rally and jumped by more than 10% during Monday's trading session hitting a new local maximum at 7.36 euro. The price broke above the previous resistance at 7.20 euro that halted appreciation many times in the past, but the contract was not able to reach the September high at 7.72 euro. The traded volume of 37.9 million allowances was a new record. 15.1 million has been traded / rolled over to Dec18. The price kept most of its gains until the market closed and it finished 63 cents or 9.5% higher. 

After opening with a two cents gap up on Tuesday, the EUA Dec17 turned lower and hit a new daily minimum at 6.88 euro. But exactly when traders expected the benchmark carbon contract to give back all the gains of Monday, the price turned higher again. By the end of the day, the EUA Dec17 climbed back shortly above 7 euro, but settled with a loss of 30 cents or 4.1% at 6.98 euro. 

The EUA Dec17 had a weak start to the day on Wednesday and slipped to the 20 day moving average. Although the price climbed higher in the second half of the day, it still closed with a loss of 5 cents (-0.7%). 

On Thursday, the EUA Dec17 opened flat and slipped to a daily minimum of 6.78 euro in the morning hours. The strong auction (clearing price in line with the secondary market) lifted the price back towards 6.90 euro. Early in the afternoon, the price of carbon started rallying hand in hand with Western power prices on the announcement of the French nuclear safety authority to shut down 4 generation units at the Tricastin nuclear power plant. The price hit a daily maximum at 7.33 euro, just 3 cents below Tuesday’s maximum. By the end of the day however the effect of the announcement vanished in both power and carbon markets. The EUA Dec17 finished the day at 6.96 euro, just 3 cents above Wednesday’s settlement. Thursday’s candle was a doji showing hesitation of the market participants about which direction to take.

On Friday, the price opened with a 10 cents gap down, but increased continuously during the day. The rally accelerated after the auction cleared at a premium to the secondary market. After reaching a daily maximum at 7.29 euro, the price turned lower. It closed the day with a gain of 1.6%.

This week, the volume of auctioned allowances will decrease by more than 20% as there won't be any auction on Tuesday due to a public holiday in Germany (Reunification Day). The lower supply could support the price and keep it above the 7 euro level. 

Technical discussions about the reform of the EU ETS continue on Thursday. Any leaked information about support for more ambition could also have a positive effect on the carbon market.

Energy mix could be still the most important factor impacting the price of allowances. The seasonality chart of the EUA price shows that prices tend to increase in October with the official start of the heating season. In addition, carbon (and power) market has the inspection of the French nuclear safety authority ASN as Damocles' sword above their heads.

From a technical perspective, the benchmark carbon contract established an increasing trend channel since mid-May from which it broke beginning of September as the price increase accelerated. In the last two weeks the price moved in a triangle near the 7 euro level. From the downside, the 20DMA (at 6.85 euro) provides a good support, followed by the 30DMA and local minimums close to 6.50 euro. To the upside, local highs near 7.40 euro represent the first strong resistance. We expect the price to move within the above range before the next trilogue meeting.

Source: Bloomberg, ICE

Monday, September 25, 2017

EUA Dec17: Price heads back into trend channel

Lower power prices and the deteriorating profitability of coal fired power plants weighed on the price of carbon last week. The benchmark contract lost 4.3% in a weekly comparison.

As expected, the EUA Dec17 had a quiet start to the week. It opened with a 2 cents gap up and hit a daily maximum at 7.05 euro before falling to an intraday minimum of 6.71 euro. The daily range of 34 cents was significantly narrower than the 44-68 cents seen in the last week. The traded volume of 11.9 million allowances in the benchmark contract was also below the average of last week at 20 million. The price closed down 22 cents or down 3.2% from last Friday. 

On Tuesday, the benchmark carbon contract opened flat compared to Monday’s settlement and traded comfortably around 6.80 euro until the auction. 10-15 minutes after the auction, the price started rallying on news about ASN extending the inspections at EDF’s nuclear power plants. The front year German power and the EUA were jumping hand in hand. The EUA Dec17 reached a daily maximum at 7.20 euro. It retreated in the afternoon, but remained above the 7 euro level and closed the day with a gain of 29 cents (+4.3%). The traded volume of 34 million was the highest this year, although big chunk of it came from block trades and from rolling positions to Dec18 (13.8 million). 

The benchmark carbon contract opened with a 6 cents gap up on Wednesday, but declined continuously during the day on lower power prices and the deteriorating dark spread. The price reached a daily minimum at 6.79 euro, but managed to return back higher. The EUA Dec17 still finished the day in the red losing 12 cents or 1.7%. The MACD slipped below the signal curve, providing a bearish signal for the next days.

On Thursday, the EUA Dec17 repeated Wednesday’s pattern: it opened flat to previous day’s close and declined continuously during the day pressured by falling power prices and deteriorating dark spread. The price hit a daily minimum at 6.47 euro, a level not seen since 6 September. The price closed at 6.56 euro, the 20DMA exactly. The traded volume of 19.5 million allowances was the second highest this week. 

The EUA Dec17 consolidated comfortably around 6.60 euro in the first half of Friday, but in the afternoon, approximately after the time the British PM held her speech in Florence, buyers lifted the price to a daily maximum at 6.74 euro. By the end of the day, the price retreated somewhat, but still closed 9 cents (+1.4%) higher.

In the first half of this week, market will have to digest the German election results, especially the surprising success of right wing AfD. The euro weakened versus the USD immediately after the publication o the first results and if it is not able to consolidate again, it will deteriorate the German dark spread and have therefore a negative impact on the price of carbon.

On Monday, carbon market participants will also keep an eye on the meeting of the representatives of the Council and the European Parliament, as they will discuss the amended draft to extend the Stop the clock measure for airlines and the limitation of the eligibility of the UK allowances in the case of a hard Brexit. 

As the price of carbon showed a strong correlation with that of German power recently, the weather forecast about above average temperatures this week might also weigh on power and carbon prices. 

All in all, we expect the price of the EUA Dec17 to move between 6.00 and 7.00 euro this week, meaning that the price returns into the increasing trend channel that started mid-May.

Source: Thomson Reuters, ICE

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