Monday, January 11, 2016

EUA Dec16 got oversold after starting the year with 10% decline

Although the EUA Dec16 managed to close the last trading day of 2015 one cent above the previous settlement price and it was the best performing commodity all around the world, it started the new year with sharp declines as negative news weighed on the market. The benchmark carbon contract closed each day of the week with sharp losses.

It would be difficult to mention one specific reason for the move. Investors turned their back to risky assets in general after weaker than expected Chinese data provoked worries about the slowing economy there. Stock indices around the world fell sharply, the Brent lost 10%, German front year power fell to levels not seen since 2003. The carbon market also seemed missing the support of utility buyers as the daily EUA auctions didn’t start yet in the first week of the year.

The price fell below the December 2015 low at 7.96 euro and below the 200 day moving average Wednesday. Latter didn’t happen since last March. More importantly, the price fell from the increasing trend channel that started in 2014 in parallel with back-loading. The price got heavily oversold with the relative strength index plummeting to 20, deep below the critical 30 level that already indicates oversold prices.

The price fell to 7.40 euro on Thursday, a level not seen since June last year. The price looked like a falling knife that nobody dared to catch. 

Global investor mood seems still to be negative with Asian stock indices falling to their lowest levels in four years and Brent losing further 2% this morning. The daily EUA auctions restart this week with volumes being some 0.5 million higher than last year. Carbon market participants might also stay at the side lines of the market as the timeline of the post-2020 ETS reforms seems to be pushed forward and parliamentary committees still spit about their responsibilities. Should the bears continue to dominate the market, the price could retest 7.40 euro. Below this level the next support is a Fibonacci level at 7.29 euro (also support and resistance level several times in 2015).

Should the restart of EUA auctions, however, bring utilities (and other buyers) to the market, the first resistance is at 7.80 euro, a close and an open from last week. This is followed by a Marubozu line at 7.95 euro, before the price could retest the 8.00 euro level where the 200 day moving average is waiting.

Source: Bloomberg L.P.

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