Monday, June 25, 2012

EUA Dec12: Correction ahead?

The EUA Dec12 reached EUR 8.20 on Friday and EUR 8.29 today. The question is if the rally can persist in the coming days or not.

The leaked document about the EC possibly setting aside some 1.2bn allowances from Phase 3 auctions gave a positive impetus to carbon prices which came first above the EUR 7.67 and then above the EUR 7.82 technical levels. 

Hitting these levels activated stop-losses and the price went easily above EUR 8. (This means that market participants who expected prices to fall and opened short positions earlier saw the stop-losses of their positions activated and had to purchase allowances.) Additionally, on Friday afternoon the European Central Bank (ECB) reduced its collateral requirement for its asset backed loans. This way it will be easier for European banks to get financing from the ECB and they might be more willing to grant loans to corporates. At the time of the announcement markets switched to risk-on mood that helped the carbon to go above EUR 8.20. 
Today in the morning, however, market started to realize profits and the price decrease to EUR 7.82. This is absolutely normal as the carbon became strongly overbought. (Relative Strength Index was at 77.9 and the price left the upper Bollinger band.)

Couple of things support or opinion on a price decrease:
  • Last Thursday a German law office said that the modification of the auction regulation might breach the European law. The expertise was paid by a lobby group; therefore it hadn’t have any price effect. On Friday, however, three departments of the European Commission (the directorates for industry, transport and economic and financial affairs) voiced concerns about the modification as well. The objections voiced by the three departments include concerns about the impact of the regulation on the predictability of the EU emissions trading system, or ETS, a lack of a full impact assessment, and questions over the legality of postponing auctions.
  • Barclays slashed its EUA price forecast for Phase 3 by 50% to EUR 8 in its carbon market report on Friday. The analysts also said that without an EC intervention the price might average at around EUR in the 2013-2020 period.

On the other hand there are some fundamental aspects providing support to the price:
  • Oil prices increase today in the morning as tropical storm Debby made oil producers in the Gulf of Mexico to reduce their production by 8% and Norwegian production was reduced due to strikes of employees pressing for higher wages and pensions.
  • The weather forecast for this week indicates lower temperatures for the continent. 

These supportive factors might help the EUA Dec12 to reach EUR 8.37 where the 200-days moving average awaits it building a strong resistance there, but we see higher probability for a downwards correction. In this case the earlier resistance at EUR 7.67 might be a support now. (Before that we can see a 23.6% Fibonacci retracement at EUR 7.79.)

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