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.

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