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.


Monday, September 12, 2016

EUA Dec16: Consolidation around 4 euro

Although it hit a new 3-year low on Monday, the EUA Dec16 consolidated around 4 euro last week and closed unchanged in a weekly comparison.
Despite opening 5 cents above the settlement price of the Friday before, the EUA Dec16 slipped lower to an intra-day low at 3.87 euro after the auction on Monday, a new 3-year low. The price could not recover by the end of the day, and closed below 4 euro (for the first time since May 2013). The price lost 3.7% on a daily basis. The RSI slipped below 30 suggesting that some correction might be in the cards.
After 7 black candles and an RSI at 28 we saw a white candle on Tuesday. The price opened 4 cents above Monday’s settlement price, but fell to an intra-day low at 3.90 euro in the morning as the price of Brent went through a correction. The strong auction result, however, pulled the price above 4 euro again and it closed at 4.13 euro, up by 20 cents or 5%. The decline of the two previous days, however, pushed the 20DMA below the 30DMA, which is a bearish signal.
Despite a strong opening (4 cents above Tuesday’s settlement price), the EUA Dec16 slipped continuously on Wednesday, and closed at 4.01 euro, down 12 cents or 2.9%.
The EUA Dec16 moved in a narrow range of 12 cents on Thursday. The price received support from the falling coal price, the stronger euro and the improving dark spread. The price got a special boost in the afternoon from the rallying oil price. (US crude inventories surprisingly declined versus the expected increase.) It therefore closed at its daily high, at 4.08 euro, up by 1.7%.
The benchmark carbon contract had a quiet Friday. It moved in a 13 cents range, climbed to an intra-day high at 4.15 euro before falling back to Thursday’s closing level. Friday's candle is a doji that often signals the hesitation of the price about which direction to take.
The daily minimums since last Monday when the price hit 3.87 euro (a three year low) increased every day, but the price could not break above 4.17 euro (although trying three times). 
The technical indicators are in neutral territory (with the exception of the 20/30DMA cross) and price seems consolidating around 4 euro. We have a neutral view on the carbon price for next week with a base range of 3.80-4.30 euro, emphasising that the auction results and the energy mix can increase the volatility of the price.



Source: Bloomberg L.P.

Monday, September 5, 2016

EUA Dec16: September auctions weigh on the price

As written in our previous blog entry the reduced auction volume of the last summer week was not able to provide support to the EUA price. We saw only black candles in the chart of the EUA Dec16 last week and the price lost more than 13% in a weekly comparison. Falling oil prices and the further worsening dark spread weighed on the price in the first half of the week, but the biggest shock was brought by the first September auction. 
The EUA Dec16 was captured by the 20 and 30DMAs on Monday as it moved in a narrow range of 7 cents between 4.66 and 4.73 euro. The traded volume was extremely low as many market participants stayed away from the market due to the summer bank holiday. By the end of the day the price returned to Friday’s closing level at 4.70 euro.
The benchmark carbon contract opened 3 cents above Monday’s settlement price on Tuesday and jumped quickly to 4.78 euro, but was not able to keep its gains and fell back sharply in the afternoon when oil price got under pressure from the strong dollar and comments from Iran about increasing its production. By the end of the day the price closed at 4.55 euro, 15 cents (-3.2%) below Tuesday’s settlement price.
After opening 2 cents above Tuesday’s settlement price, the EUA Dec16 jumped to 4.62 euro early in the morning on Wednesday as some market participants thought that the fall the day before was overdone. Before noon, however, the price already turned back to the daily minimum. The decline got steeper in the afternoon, after US crude inventory data were released. The price fell to 4.40 euro, breaking the Fibonacci level at 4.51 euro, and the local low at 4.46 euro. By the end of the day the price fell by 1.8%.
Plummeting oil prices and the further worsening of the German dark spread kept the EUA Dec16 under pressure on Thursday as well. The price opened at Wednesday’s settlement level and climbed above the 4.51 euro Fibonacci level, but was not able to stay there and fell back hitting a new weekly low at 4.36 euro. It closed at 4.38 euro, down 9 cents (-2.0%).
After opening 3 cents above Thursday’s settlement price, the benchmark carbon contract was slipping down continuously on Friday. The fall accelerated after the weak German auction result and the price fell to a new 3-year low at 3.89 euro, triggering many stop-loss orders. Prices below 4 euro, however, invited already some buyers who lifted the price back to 4.08 euro. Still the daily losses reached 6.8%.
For most of August, the EUA Dec16 traded in a range of 70 cents between 4.30 and 5.00 euro. Breaking out to the downside from this range is a negative sign. 
It is difficult to find any fundamental factor that would support the price at the moment. The market remains oversupplied, Industrial installations accumulated a surplus during the years of the financial crisis and as we could see from the recently released quarterly earnings of EU utilities they are largely hedged for this year and the next.
As auction volumes increase five-fold from last week, the question is who will absorb this supply?
The price of Brent got under pressure from the increasing US inventories, fading hopes for a production freeze by the OPEC and the strengthening of the USD versus other currencies. European gas prices fall in tandem with oil, improving gas' comparative advantage to coal. (Coal prices remained relatively high and coal got more expensive due to the appreciation of the USD as well.)
As a consequence, the dark spread feels the gravity of the 1 euro level and as the records of German energy trade group AG Energiebilanzen showed, German natural gas-fired power plants that generate electricity round the clock are making money for the first time in four years. With European gas trading near the lowest since 2010 amid ample supplies, the fuel is gaining an edge against rising prices for more profitable yet twice as polluting coal.

Although there are not many factors that could support the price fundamentally, from the technical analysis point of view the benchmark carbon contract became oversold (RSI at 31). Even the lower Bollinger band is higher (at 4.18 euro) than the current market price. Former support levels, however, work as resistances now, starting with the former 2016 low at 4.28 euro, followed by the local low at 4.46 euro from 18 August. Should the price be able to climb higher this week, it has to face the 30 and 20DMAs at 4.62 and 4.64 euro, respectively.

In a negative scenario, the 4 euro level could represent a minor support, followed by the new 2016 low at 3.89 euro. Below this level we can find local lows from May 2013 as next supports (at 3.76 and 3.36 euro).



Source: Bloomberg L.P.

Monday, August 29, 2016

EUA Dec16: Support of low auction volumes will vanish soon

After a volatile start, the EUA Dec16 had a calm week. The lack of auction supply supported the price, but the weak energy mix (especially the worsening dark spread) put a cap on the gains.
Despite the initial hesitation the EUA Dec16 gained 13 cents (+2.7%) on Monday. The benchmark carbon contract opened one cent above the settlement price of the previous Friday, but slipped quickly to an intra-day low at 4.70 euro, just one cent above the 30DMA. The price reversed direction as some market participants realized that there is really no EU auction this week. The price hit an intra-day high at 4.91 euro, a level not seen since 15 August. The traded volume of 5.4 million remained below last week’s (already low) average of 7.6 million.
The benchmark carbon contract opened 1 cent above Monday’s settlement price and increased to 4.95 euro, before turning down on Tuesday. As the energy fundamentals did not support the price, traders took profit. The EUA Dec16 fell back to an intra-day low at 4.65 euro and closed at 4.71 euro (-3.9%). The resistance at 5 euro proved strong enough to turn back the price lower. The last two candles in the chart built a bearish engulfing signalling the weakness of the price and decreasing the chances that it would be able to break the resistance at 5 euro.
The EUA Dec16 moved in a narrow range between 4.71 and 4.65 euro in the first hours of trading on Wednesday, but a strong UK auction reversed the price that reached 4.75 euro in the early afternoon. The strong dollar and the falling Brent, however, pushed the price down lower again towards 4.65 euro. The depreciation fastened on the US crude inventory data and the price hit a new intra-day low at 4.55 euro. It closed the day at 4.61 euro, down 10 cents or 2.1%.
After opening 3 cents above Wednesday’s settlement price the EUA Dec16 slipped briefly to an intra-day low at 4.58 euro on Thursday. The price recovered by noon. The 20 and 30DMAs at 4.70 euro halted the appreciation for a short time, but higher oil and gas prices helped breaking above the moving averages. The price hit an intra-day high at 4.73 euro and closed at 4.71 euro, above the moving averages (+10 cents of 2.2%).
The appreciation on Thursday lifted the 20DMA slightly above the 30DMA, but the positive signal was not followed by a rally on Friday. The price managed to climb above the moving averages, but the Fibonacci level at 4.76 euro halted the price increase.
Both the relative strength index and the MACD became horizontal lines in the recent days. For the last summer week we therefore remain neutral for the carbon price and keep our base range of 4.50 and 5.10 euro.
The lack of auctions might this week still support the price, but the period of low auction volumes ends on Friday. 
The support from the energy mix is vanishing as well. Investors believe less and less in the OPEC countries agreeing on a production freeze at their meeting end of September. And even if they agree on limiting their output at current levels, it would mean fixing it at near record high levels while the demand is expected to decline as the summer holidays / driving season ends.
Increasing expectations of a US rate hike still in 2016 will strengthen the USD and make the coal more expensive for the European utilities. Another bearish factor for the carbon price.



 Source: Bloomberg L.P.