Monday, February 16, 2015

The EUA Dec15 jumped 10% last week

Last Monday morning the EUA Dec15 retested the low at 6.87 euro from the week before, but it managed to climb back to just 1 cent below 7 euro in the afternoon, supported by a healthy German dark spread. 

Tuesday morning was characterized by range bound trading as well, but optimism regarding the outcome of the shadow rapporteurs' meeting on the next day pushed the benchmark contract above the 20 and 30DMAs in the afternoon pulling the MACD above the zero line as well. 

The price appreciation continued on Wednesday and Thursday on positive news about the MSR. The rapporteur of the draft proposed a 2018 start, putting the back-loaded allowances straight into the reserve and establishing an innovation fund. EPP and the Socialists expressed their support for the amendments immediately, but they have until tomorrow to express their opinion officially. The EUA Dec15 broke resistance levels at 7.25 and 7.33 euros, but was stopped by the 22nd January high of 7.55 euro. 

After some sideways movement in the morning, appreciation continued on Friday when the price closed at a two years' high of 7.71 euro. The local highs at 7.55 euro (from 22nd January, the date of the vote in the industry committee) and 7.57 euro (the high from 24th December 2014) were broken which might have triggered some technical trading (short squeeze).

The EUA price was supported also by positive news outside the carbon market:
  • Record long negotiations between Ukraine, Russia, the separatists and German Chancellor Angela Merkel and French President Hollande led to a ceasefire last Thursday.
  • German front year power gained more than 3% last week and the corresponding dark spread expanded almost 2% as well.
  • Brent climbed further on reported cost cuts in the sector and the weakening USD.
  • Stock indices hit new records both in Europe and the US.

From the technical analysis' point of view the price seems (almost) overbought at the moment. The relative strength index (RSI) is at 68, very close to the critical 70 level from where an asset is considered overbought.

For two days the benchmark contract trades outside the Bollinger band, and above the upper one (at 7.61 euro at the moment).

Although it is possible that we receive further positive news about the MSR (compromise amendments supported by a majority of political groups in ENVI), the above increases the chances for a correction. This latter might be triggered by the free allocation of allowances. The European Commission announced last week that it would publish the status table of 2015 free allocation on 3rd March suggesting that majority of stationary installations should receive their entitlement in the next two weeks. We only expect delays in the case of installations with a significant change in their activity levels. 

In the case of a correction, the price could retest the earlier resistance levels mentioned above (7.57, 7.55) and the moving averaged (20DMA at 7.17 euro and 30DMA at 7.13 euro).

Negotiations about the MSR might however still support the price. The first resistance is a small gap between 7.75 and 7.80 euro. The 8 euro level is a weak psychological resistance, followed by 8.10 euro, a local high from October 2012. 

Source: Bloomberg Finance L.P.

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