Thursday, January 31, 2013

EUA Dec13: Falling knife

The picture didn't change at all. Although it was oversold already the negative outcome of the ITRE vote on the 24th of January pushed the price to a historical low of EUR 2.81. The movement was overdone even according to the most pessimistic market participants. It recovered, but the main, declining trend is valid. The price just stops here and there to take a breath and continue its slope downwards.
The MACD is deep in the negative territory with the RSI at 21.5 (values below 30 signal an oversold market). The price seems to be pegged to the lower Bollinger band.

With the price in unexplored territory it is difficult to identify support levels, but the EUR 2.81 all-time low is waiting to be retested. Although the price didn't react to technical indicators recently, just dived, the possibility of a correction cannot be excluded. The closest resistance levels are at EUR 3.84 and EUR 4.11.

Wednesday, January 16, 2013

EUA Dec13: In free fall

Since the 9th of January the EUA Dec13 not only continued its path in a decreasing trend channel, but also hit new all-time lows every day. The latest one was reached today in the afternoon at EUR 5.71. 
There are several reasons behind this price “performance”:
  • EU ETS oversupplied: According to documents from the European Commission, by early 2012 the surplus had reached 955 million allowances and a continued rapid build-up is expected over the rest of 2012 and in 2013 due largely to a number of temporary factors directly related to the transition to phase three (2013-2020). This means that by the start of phase three the surplus could be well over 1.5 billion allowances or even up to 2 billion. 
  • Auctions almost every day: EEX as the transitional common auctioning platform for the EU and ICE that one chosen by the UK hold auctions almost every day. The amount of 15-18mn Phase 3 spot EUAs offered at these auctions will be completed by additional Phase 2 auctions. (Germany announced beginning of January 2013 that it had to decide about the EUAs that remained from its New Entrants’ Reserve.)
  • Political uncertainty: The European Commission suggested a short-term fix to remedy plummeting prices: the back-loading. If successfully implemented, the back-loading could push prices to EUR 13-14 levels. Before, however, the ETS Directive has to be amended in a way that it recognizes the power of the European Commission to modify the Auctioning Regulation. The European Commission said end of last year that they would wait for the Parliament and Council to amend the Directive. This suggests that the legal procedure might take long even in the case of a consensus among member states. Poland, however, is opposing any changes to be made to the Directive and the Auctioning Regulation. Germany, on the other hand, is split internally as the environment ministry couldn't convince the economy ministry that is worried about high electricity prices harming the competitiveness of the industry. Fears that there would be no back-loading in 2013 are getting stronger.
  • Glut of Kyoto credits: AS mentioned by the European Commission in its “The state of the European carbon market in 2012” report the situation is worsened by the increased supply and usage of CERs and ERUs. An international credit that is used for compliance frees up one allowance that does not need to be used for compliance. As such the use of international credits for compliance increases the surplus of allowances available to the market. This trend was sped up at the end of Phase 2 given that certain type of credits cannot be used for compliance from Phase 3 onward.

In addition to these there is still a chance that the free allocation happens by the beginning of March that – although part of a normal market functioning – is an additional supply for the market.

The price reaction was of course negative. The 20 DMA went below its 30DMA peer, forming a crossover that is considered as a bearish sign. The MACD is deep in the negative territory and below the signal line. The RSI is at 32.4, near the oversold territory, but there is still some room for further depreciation. In addition we have every week one or two days with a correction that keeps this indicator above the critical level. 
The question is how to identify support levels for a price being in free fall. (Resistance levels are the former support levels at EUR 5.93, EUR 6.22 and EUR 6.48 for the short term.) In this case the Fibonacci retracement levels might provide some indication about possible support levels. These are at EUR 5.58 and EUR 5.36 at the moment.

Tuesday, January 8, 2013

EUA Dec13: How strong is the bullish engulfing formed the 7th of January?

Traded volumes suggest that market participants are returning to the market from their holidays and technical analysis makes sense again. The EUA Dec13 tested the EUR 7.50 resistance level in December twice, but failed to break through. After the second test the price started a declining trend that lasted for nine days (from the 21st of December 2012 until 4th of January 2013).

The trend was reinforced by the MACD falling below the signal curve on the first trading day of 2013. The 30 days moving average fell below its 20 days peer the next day. The 7th of January, however, the price increased from a daily low of EUR 6.28 (the lower Bollinger band) to EUR 6.68 and closed at EUR 6.66 forming a nice bullish engulfing candle. There were several factors behind this movement:

  • Power prices increased across Europe on lower temperatures. At the same time coal prices declined, making heavily polluting coal more attractive in the eyes of power companies. (U.K. next-month coal power plant profit rises 6.2% to record 24.43 pounds/MWh)
  • The year’s first Phase 3 spot EUA auction cleared at a price 5 cents higher than current market price and the bid-to-cover ratio was higher than in December.
  • The market was mature enough for a correction after nine days of decline.

Unfortunately the traded volume on that day doesn’t seem enough for a trend reversal. The MACD is still in the negative territory. Any price appreciation therefore might be limited. The next resistance levels are the 20 and 30 days moving averages at EUR 6.84 and EUR 6.90, respectively and EUR 7.43 that was tested twice already. In a negative scenario the price might plummet to the all-time low of EUR 5.93, although there is a weak support level at EUR 6.22.