Monday, October 24, 2016

EUA Dec16: Overbought power might put a cap on carbon's potential gains

The EUA Dec16 closed its sixth week in a row with gains last Friday (+1.38% w/w). 
After opening 1 cent above previous Friday’s settlement price, the EUA Dec16 increased continuously on Monday as it received support from higher power prices, the improving dark spread and a nice auction cover ratio. The benchmark carbon contract reached an intra-day high at 6.04 euro (just 5 cents below the October high), but it was not able to maintain its gains and slipped back to close at 5.87 euro, just 6 cents above the previous settlement price.
The EUA Dec16 opened with a 4 cents gap up on Tuesday. Supported by the news that five French nuclear power plants will be taken off-line in the next three months, the price hit a new 4-month high at 6.14 euro. By the end of the day, however, the price returned below 6 euro.
The benchmark carbon contract opened in a positive mood with a 3 cents gap up on Wednesday, and it increased to an intra-day high at 6.06 euro, but it lost steam very quickly and fell hand in hand with European power prices. It closed the day at 5.67 euro, just one cent above the intra-day low at 5.66 euro. The five white candles of the previous days were followed by a black one on Wednesday. Unfortunately, this last candle had a bigger body than the former one forming a bearish engulfing on the chart.
Although the benchmark carbon contract attempted to climb higher on Thursday, it lost 1.6% by the end of the day. After hitting an intra-day high at 5.78 euro, it slipped lower continuously and fell to an intra-day low at 5.50 euro. By the end of the day it recovered somewhat, but closed only 8 cents above the daily low. The decline of the last two days pushed the price close to the lower edge of the increasing trend channel
The strength of the US dollar and the news about France giving up its plan of the carbon price floor were expected to weigh on the price on Friday, but the negative effect did not last long. The price opened with an 8 cents gap down, but reversed its direction quickly to jump to an intra-day high at 5.95 euro. The price was able to keep its gains until the last minute of trade and finished 5.6% higher.
Friday’s candle formed a bullish engulfing and lifted the price back above the lower edge of the increasing trend channel. (See the chart below.)
Should the positive effect of the increasing power prices persist, the EUA Dec16 could climb above 6 euro again this week. 
On the negative side, both power and carbon markets are already in or close to overbought territory, which increases the probability of a correction. The German front year power touched the 200DMA last Friday for the first time since 2011 and its RSI is at 74 (overbought). 
We therefore remain cautious for this week. Our base range is therefore between 5.40 and 6.14 euro.

 Source: Bloomberg L.P.

Monday, October 10, 2016

EUA Dec16: Consolidation after filling the Brexit gap

Supported by rising power and gas prices, the EUA Dec16 gained almost 15% and even touched 6 euro last week.
The EUA Dec16 opened with a 6 cents gap up at 5.02 euro and climbed continuously last Monday to hit an intra-day high at 5.39 euro. The price didn’t trade this high since the Brexit referendum. The 200DMA, however, stopped the appreciation (for the second time in 3 days).
Despite opening with a 5 cents gap up Tuesday morning,  the price was not able to maintain its gains. From its 5.36 euro opening price it slipped continuously during the day. The lowest level hit was 5.11 euro, but it recovered by the end of the day. It closed at 5.21 euro, a loss of 10 cents or 1.9%. For the third time, the 200DMA at 5.37 euro stopped the appreciation.
The positive signal received from the 20DMA crossing the 30DMA got confirmed on Wednesday. The price opened with a spectacular 12 cents gap up. After some hesitation in the morning hours, the price jumped above the 200DMA at 5.36 euro (for the first time since January) and rose to an intra-day high at 5.52 euro. This way the price reached the intra-day low on the day before the Brexit referendum (5.50 euro) which made some market participants think that the gap left after the referendum has been filled. The real upper edge of the gap was however the 5.65 euro level (the closing price on the day of the referendum) which left some space for further gains. The price received support from a stronger than usual UK auction, the continuing rally in the commodity prices and a surprising decline in the US crude oil inventories.
Despite opening with a 4 cents gap down at 5.44 euro, the EUA Dec16 appreciated step by step on Thursday. It broke several resistance levels, filled the gap left after the Brexit referendum and climbed even above 6 euro. The highest level hit during the day was 6.09 euro. It closed, however, below 6 euro, at 5.86 euro as profit taking started late in the afternoon.
The decline continued on Friday, but the 5.50 euro level proved a good support during the day.
Despite the correction in the last 1.5 days the increasing trend is still valid. 
Should power and / or oil prices support the carbon this week, the next resistance after last week’s high at 6.09 euro is a local high from June at 6.38 euro.
High cover ratios in last week's auctions and an increasing volume traded in the Dec17 and Dec18 contracts suggest that utilities increased their activity. This might be supportive for the carbon price.
Political activity might increase the volatility in the carbon market, but not in the usual way. 
Although the European Parliament's industry committee votes about the post-2020 reform of the ETS, we do not expect major surprises from the event as the compromise amendments of the four biggest political groups are known.
But oil exporting countries will meet again, this time in Istanbul. Should the countries surprise markets with an agreement about the details of the oil production cut (they agreed on last month in Algiers), the market might react in a positive way. (Especially, after Russia saying last week that it only goes to Istanbul for negotiations, but not for a deal.)
If the correction continues (as the RSI is still very close to overbought territory), the first strong support is the 200DMA at 5.32 euro followed by the psychologically important 5.00 euro level.
All in all, we expect the price to consolidate between the 200DMA and last week's high in the next couple of days.

 Source: Bloomberg L.P.

Monday, October 3, 2016

EUA Dec16: Consolidation near 5 euro expected

Supported by European power prices, the benchmark carbon contract gained 9.25% last week.
The EUA Dec16 opened 1 cent above Friday’s settlement price last Monday and after falling to an intra-day low at 4.48 euro, it climbed higher and finished the day at 4.62 euro, up 8 cents or 1.8%. For the second time, it was the Fibonacci level at 4.72 euro that stopped the appreciation. The price received support from higher power prices in Europe. It was also the first day of the International Energy Forum in Algiers and the host country spoke up the oil price by saying that any agreement would be possible.
After four white candles the benchmark carbon contract, however, got under pressure on Tuesday. It opened at 4.61 euro, 1 cent below Monday’s settlement price and although it spent some minutes in the positive territory, it closed the day 19 cents or 4.1% lower, as hopes for an oil production freeze faded.
Opening with a 3 cents gap up at 4.46 euro, the EUA Dec16 appreciated continuously in Wednesday’s trading thanks to the rally in French and German power prices. It hit a new local high at 5.02 euro, a level not seen since 18 July. The traded volume was the second highest after the day of the Brexit referendum which confirmed the positive momentum.
With an unexpected last minute agreement amongst OPEC members to limit production to between 32.5-33 million barrels per day, carbon prices received a boost Thursday morning. The price opened with a 4 cents gap at 4.99 euro and jumped to 5.37 euro. The price filled half of the gap left after the Brexit referendum (between 5.24 and 5.65 euro). A correction in the oil and power prices in the afternoon, however, did not leave the EUA Dec16 untouched. The price closed at 5.02 euro, a gain of 7 cents (+1.4%) from Wednesday’s settlement price.
The price calmed down and oscillated around 5 euro on Friday. The correction in oil and power prices exercised a negative impact on the price, but when the price fell below the psychologically important round figure, buyers appeared. The closing price at 4.96 euro is 9.25% above the settlement price of the Friday before. 
The fact, however, that the price was not able to stay above the 5 euro level, might make some market participants hesitating about opening new long positions. (The same is true for the front year German power which was not able to stay above the 30 EUR/MWh level.) 
In the case of a correction, there are some weak support levels at 4.80 and at 4.62 euro (both Fibonacci retracements). The strong support is seen near 4.50 euro. There is another Fibonacci level at 4.44 euro, the 30DMA is at 4.41 euro and the 20DMA at 4.32 euro. 
Another possible scenario is that the price only returned to the upper Bollinger band (4.99 euro) after closing outside the band for two days and that the price continues its path upwards in the coming days. Besides the energy mix the missing Monday auction (Germany celebrates its reunification) might be supportive for the price. In this case the price has to break the key 5 euro level first before it could retest last week's local highs at 5.12 and 5.37 euro.
All in all, we expect the benchmark carbon contract to consolidate near the 5 euro level this week. Our base range is between the 30DMA (at 4.41 euro) and the 200DMA (at 5.40 euro).

Source: Bloomberg L.P.

Monday, September 26, 2016

EUA Dec16: Auction cover ratios and political debates in focus this week

The EUA Dec16 had a volatile day on Monday. After opening 4 cents above last Friday’s settlement price, it fell by 3.7% to an intra-day low at 4.20 euro, but it recovered in the afternoon and closed the day with a gain of almost 1%. On Monday it was again the 30DMA which halted the rally, just like the Friday before. Monday’s candle was a doji, showing uncertainty in the market about which direction to take.
The EUA Dec16 opened one cent below the previous settlement price on Tuesday. For a short time it was able to touch the 4.40 euro level, but fell then continuously. It broke below the 20DMA, the earlier support at 4.28 euro and Monday’s intra-day low at 4.20 euro could not halt the depreciation either. By the end of the day it closed at 4.16 euro, 24 cents or 5.0% below Monday’s settlement. The price cancelled almost all the gains of the previous two days. The 10-minutes chart of the benchmark carbon contract shows a double top. If the pattern is right, the price might test the support level at 4.00 euro.
The benchmark carbon contract moved in a narrow range on Wednesday, as investors stayed at the side lines of the market before the rate decision of the US Federal Reserve. Despite opening 4 cents above Tuesday’s  settlement price, the 20DMA limited gains. By the end of the day, the price gained 6 cents.
The decision of the Federal Reserve gave wings to all markets and switched investors in risk-on mode. The EUA Dec16 opened with a gap up on Thursday and appreciated continuously during the day to hit a local high at 4.46 euro. The price kept its gains until the market closed at finished the day at 4.42 euro.
The rally continued on Friday, when the price reached a new September high at 4.69 euro, a level not seen since 30 August. AS the German front year power hit a one month high, the dark spread jumped above 2 EUR/MWh for the first time since the beginning of July. The benchmark carbon contract gained more than 4% in a weekly comparison.
Despite the jump of the last two days the relative strength index (at 56) leaves room for further appreciation. 
There will be only four EUA auctions this week offering a total of less than 15 million allowances, as on Wednesday 0.7 million EUAAs will be auctioned on behalf of the EU. The last two auctions had a cover ratio above 2, which might be a positive signal that utilities are back in the market and hedging their production.
The environment committee of the European Parliament will debate the amendments submitted to the report of the rapporteur Ian Duncan about the post-2020 reform of the EU ETS on Thursday. Should the discussion show support for higher ambition, it might support the price of the benchmark carbon contract. 
One of the most expected events of the carbon market is the General Assembly of the International Civil Aviation Organization (ICAO) starting on Tuesday. The ICAO might reach a historical agreement about how to limit aviation emissions from 2021. This would be the first worldwide sectoral regulation of emissions. Although it seems likely that the scheme would be voluntary in the beginning, market participants focus on the list of eligible units. Should EUAs and CERs be part of the list, their prices might show a positive reaction.
AS the price of carbon tends to show a certain correlation with the price of oil, the International Energy Forum in Algiers in the firts half of this week might have a special importance for the carbon market. Should the oil exporting countries be able to surprise markets with an agreement about coordinated action to support the price of oil, this could be supportive for the EUA price as well.
In a positive scenario, the EUA Dec16 might retest last week`s high at 4.69 euro and the following Fibonacci level at 4.72 euro. If these levels get broken the next resistance is the local high at 4.97 euro.
In the case of a correction, the first support level is near 4.40 euro (30DMA and a Fibonacci level), before the 20DMA at 4.23 euro.
After the recent rally we remain cautiously optimistic regarding the price development of the EUA Dec16, keeping in mind that disappointing political decisions (in ENVI, ICAO or OPEC) represent a bearish risk for the price.

Source: Bloomberg L.P.

Monday, September 19, 2016

EUA Dec16: Short covering lifted MACD above signal curve

Thanks to the rally in the last two days of last week, the EUA Dec16 gained 7% on a weekly basis. 
All markets opened in a negative mood last Monday after Fed members increased the likelihood of a September rate hike. The carbon market was no exception. The first trades still lifted the price to 4.12 euro, but soon the price turned lower and fell below 4 euro. The price received an additional negative impact from the weak auction that cleared at a significant discount to the secondary market price. From the intra-day low at 3.94 euro the price recovered in the afternoon when US markets opened. By the end of the day the price climbed back above 4 euro and closed at 4.03 euro, still 5 cents below the settlement price of the Friday before.
The benchmark carbon contract had a quiet day on Tuesday. It opened 3 cents above Monday’s settlement price, but only increased to 4.07 euro. After the weak auction cover ratio it even visited levels below the 4 euro level, but it recovered by the end of the day to close unchanged in a daily comparison at 4.03 euro.
After some initial hesitation, the EUA Dec16 opened at Tuesday’s settlement level on Wednesday. After jumping to an intra-day high at 4.08 euro the price fell continuously until reaching 3.96 euro. The price was not able to recover by the end of the day and closed at 3.98 euro, below the critical 4 euro level for the first time since 5 September.
Finally, the benchmark carbon market had a positive day on Thursday. It opened at 4 euro, two cents above Wednesday’s settlement price, fell briefly to an intra-day low at 3.95 euro, but turned back higher in the second half of the day. The last minutes of trading saw a spectacular rally and the price jumped to 4.16 euro. The price managed to keep its gains until the market closed and it settled at 4.14 euro (+4.0%). The price broke the resistance of 4.07 euro and this might have triggered some short covering as volume also jumped at the breakthrough.
The rally continued on Friday when the EUA Dec16 gained 22 cents or 5.3%. The appreciation started after the strong German auction and accelerated when the price broke the 4.28 euro resistance level which triggered many short sellers to close their positions. The price also broke the 20DMA at 4.33 euro, but was halted by the 30DMA at 4.48 euro. 
The rally lifted the MACD above the signal curve which is a bullish signal, although both (the MACD and the signal curve) are still in the negative territory. The price also broke out from the narrow range it was moving in in the first half of September.
Although it seems that most of last week's rally happened thanks to the closing of short positions, it might also happen that the market started to cautiously price in the leaked post-2020 reform proposals that show increased ambition to cut GHG emissions (linear reduction factor of 2.4% instead of the 2.2% as proposed by the European Commission, rebasing the cap from 2021). 
The relative strength index (RSI) reached 50 on Friday leaving some room for further appreciation. Should the rally continue, the first resistance is the 30DMA at 4.46 euro, followed by 4.78 euro, the level from which the price turned down 30 August.
Despite the nice rally last week, we have to emphasise the risks that might limit further gains.
1. Most importantly, there will be five auctions this week increasing the supply of allowances by 24% in a weekly comparison. 
2. Volatility in Brent and other related commodities might increase with the International Energy Forum in Algiers (26-28 September 2016) approaching and different participants commenting about a possible agreement of oil producing countries about coordinated action.
3. Main focus will be on the Fed rate decision and the following press conference of Wednesday. No change in the current rates is expected by the market, but should the Fed surprise investors with a rate hike, it might affect negatively commodity and stock prices.
In the case of a correction, earlier resistances will work as supports (the earlier 2016 low at 4.28 euro, the psychologically important 4 euro and the new 2016 low at 3.87 euro).

Source: Bloomberg L.P.