Monday, January 26, 2015

EUA Dec15: Weighing the options after the ITRE shock

The EUA Dec15 had a strong start to the week as positive news from the shadows’ meeting in the ITRE committee pulled the price above the resistance level at 7.33 euro on Monday. 

Gains were annulled on Tuesday on the withdrawal of the amendment about the 2019 start date by conservative MEPs in ITRE, but losses were limited by the 20DMA at 7.17 euro. 

On Wednesday, the price broke the resistance at 7.42 euro, a level that stopped appreciation in the two days before. The meeting of the environment committee in the afternoon confirmed market's expectations about enough support for the early implementation of the market stability reserve and putting the back-loaded allowances directly into the reserve.

Speculation drove the price to 7.55 euro on Thursday morning, but the fact that MEPs in the industry committee were too split to come to an agreement about the parameters of the MSR, pushed it down to 7.00. 

The price fell further to 6.81 euro in the afternoon and the two candles from Wednesday and Thursday formed a bearish engulfing. The MACD crossed the signal curve and the 20DMA was also about to cross the 30DMA. All signals of pressure on the price. 

The price consolidated in the 6.80-7.00 euro range on Friday and found the same support today in the morning despite the huge auction supply this week (more than 14 million allowances will be auctioned) and the negative news from Greece and Ukraine that made investors in other markets turning their back to risky assets.

The reason might be that the market still sees a chance for a 2017 starting date of the MSR to be proposed by the environment committee which also supports the idea of not letting the back-loaded allowances to the market to avoid a zigzag in prices at the end of the phase. Beside the parameters, however, a new question emerged: how quick and smooth can the reform be approved? Will the rapporteur ask the Parliament for an opinion about the MSR and for a mandate to start trilogue negotiations first or initiate it based on the text approved in ENVI already? 

We can't let without mentioning the German dark spread either which was improving step by step in January and providing a support to the carbon price.

RSI, on the other hand remained in the neutral territory (43).

We could identify support levels at 6.31 (the 200DMA), 6.56 (a Fibonacci retracement level) and 6.80 euro ( the level that stopped the price from falling further last week).

7 euro is only a psychological resistance, but near 7.10 euro three indicators are waiting for the price: the 20 and 30DMA and a Fibonacci level. 

Our base range for the week is therefore 6.80-7.10 euro, which can be of course overwritten at any time into any direction by an MEP in Brussels. 

Monday, January 19, 2015

EUA Dec15: Political decisions might pull the price out of its comfort zone

As we wrote in the previous issue there were several signs for the market looking for a bottom in the first week of January. Hesitation characterized last Monday’s trading as well. The price fell to 6.67 euro, a level not seen mid-December. 

The ITRE rapporteur’s new proposal on Tuesday of an MSR start in 2019 however gave wings to the price that broke the 7 euro level, the 20 and 30DMAs and several Fibonacci retracement levels. On the last three days of the week the price moved in a range between the 20DMA and 7.48 euro.

The MACD is above the zero line again and crossed the signal curve, which can be considered as a bullish sign. Until the ITRE vote however we expect the price to move sideways between 7.00 and 7.50 euro.

Source: Bloomberg Finance L.P.

Monday, January 12, 2015

EUA Dec15: Will Spain or the Czech Republic make the price leave its comfort zone?

Despite the fact that carbon market analysts raised their expectations for the average EUA price in 2015 to reflect their optimism about the implementation of the market stability reserve. Members of the ENVI committee submitted more than 200 amendments to the proposal which might have been interpreted by some market participants that we would see the same lengthy legal procedure of back-loading.

At the same time EPP, the biggest political group in the European Parliament is still split about the parameters of the reform. Other fact that can make buyers hesitating.
After losing more than 5% the week before the EUA Dec15 continued its downward path last Monday when it fell below the 20 and 30DMAs and visited shortly levels below 7 euro. By the end of the day it still managed to climb back above the key psychological level which was not the case on Tuesday when the benchmark contract closed at 6.86. The price reached its weekly low on Wednesday at 6.68 euro, but climbed back above the Fibonacci level at 6.79 euro and closed at 6.87, 1 cent higher than the day before.

Wednesday’s hammer and Thursday’s doji are both indications for the price looking for a bottom.
The MACD however crossed the zero line on Friday which is a bearish signal. The RSI at 37 still leaves room for further depreciation.

The closest support was the low from last week at 6.68 euro which was just broken today in the morning. The following support can be found at 6.55 euro, the daily low from 10th December.
To the upside the first resistance is a psycological one at 7 euro, but this is also close to the 30DMA (at 7.03 euro) and 20DMA (at 7.09 euro).

Our base range for this week is therefore 6.55-7.00 euro. This can be easily overwritten however by government representatives who meet on 13th January (Tuesday) to discuss the MSR. The countries with no official position about the proposal yet, but with a significant number of votes in the Parliament are Spain and the Czech Republic. If any of them comes up with a support or rejection of the MSR, it can move the price out from the band mentioned above.

Tuesday, January 6, 2015

Brent at levels last seen in 2009

The price of Brent fell close to 50 dollar, a 5.5 year low on 6th January. The decline since summer reaches 55%. There might be several reasons behind the move:

  • Market expects the US to abolish export bans,
  • Production in Russia increase last year and production in Iraq and the US is expected to increase in 2015.
  • OPEC is not expected to cut production levels any time soon. Saudi Arabia applies a discount to the European sales in order to be able to get rid of the oil it couldn't sell in the US:
  • Global economy, on the other hand is still fragile. This coupled with the strong US dollar  which might result in lower demand. 

The MACD is deep in the negative territory and crossed the signal curve just yesterday. The decline seems unstoppable, although the relative strength index is in the oversold territory (at 19). In the case of a correction the first resistance level to combat is at 60 dollar (also the 20DMA).
If the decline of the price continues and it breaks the 50 dollar level, there is space enough until 40 dollar for further losses.

As gas prices in European contracts are generally indexed to the oil price, the recent depreciation of the Brent might drag the gas prices lower as well increasing its competitive advantage to coal. By the end of the day this could have a negative effect on the carbon prices as well.

Monday, January 5, 2015

EUA Dec15: Holiday hangover

Helped by falling coal prices, last Monday’s first trades closed near the local high hit on 24th December at 7.57 euro, but the  EUA Dec15 returned below the upper Bollinger band in the afternoon and closed at 7.34 euro. The low hit on Monday at 7.23 euro proved a good support for the rest of the week.

After having been tested three times, the support was broken on Friday when the benchmark contract fell with a dramatic move to the 23.6% Fibonacci retracement level at 7.08 euro. Despite some intra-day recovery the EUA Dec14 closed just one cent above the daily low. The MACD crossed the signal curve last Friday.

In the absence of political news the carbon market was mainly influenced by the prices in the energy market where the German front year power fell to an all time low.

Taking last October’s and December’s lows as the two points of an increasing trend line, the trend is still not broken. In addition last week’s move was not supported by a significant volume which makes any statement of technical analysis less reliable. In order to break the trend line the price would have to fall to approximately 6.90 euro, but at this level the RSI (now at 47) would reach the oversold territory, so the price might pick up again.

Normal life is expected to return to the markets this week as traders are beck to their desks after a long holiday. EUA auctions resume on Wednesday. The increased supply might have a negative impact on the market price.

At the moment the strongest support level is around 7.06 euro. We can find moving averages, a Fibonacci retacement level and local lows here. The next support might be the 6.90 euro level mentioned above, followed by 6.56 euro (a Fibonacci retracement level and a local low from December).

To the upside the price has to combat the resistance levels at 7.38 and 7.57 euro.