Monday, April 18, 2016

EUA Dec16: More negative than positive factors identified for this week

Supported by higher power and oil prices, a strong auction result and compliance buying, the EUA Dec16 posted a rally of 2.6% and hit a new 2-month high at 5.62 euro last Monday. The price broke above the resistance at 5.49 euro (a local high from 22 February) which opened the space until the next resistance at 5.85 euro, a level tested three times between 2 and 4 February.

After the rally on Monday, the EUA Dec16 was able to climb even higher on Tuesday. The price opened at 5.60 euro, 2 cents above Monday’s settlement price. The benchmark contract jumped to a weekly high of 5.67 euro after a strong auction. In the afternoon we could see some profit taking as the upper Bollinger band limited further gains. By the end of the day the EUA Dec16 closed at 5.59 euro, 1 cent above Monday’s settlement. Tuesday’s candle looks like a doji again, indicating hesitation of the market about what direction to take.

Despite opening 2 cents above Tuesday’s settlement price, the EUA Dec16 lost 5 cents (-0.9% d/d) on Wednesday. Tuesday’s doji candle indicated already that there is a chance that the rally could stop. 
After the negative comments of the participants of the Doha conference on Sunday, Brent was not be able to support the carbon and the weak euro pushed the dark spread lower.

After two days the EUA Dec16 resumed its increasing path on Thursday. In the first hours of trading the price tested the downside and fell to 5.42 euro. The afternoon bought buyers back and they lifted the price to 5.62 euro. The closing price was just 1 cent below the intra-day low.

The weak dark spread and the falling oil price weighed on the carbon price Friday morning. It slipped to an intra-day low at 5.44 euro, but recovered in the afternoon.

If we take into consideration the strong correlation observed between the price of carbon and that of Brent in the first months of 2016, today's weak opening of the EUA market should be no surprise as the meeting of the biggest oil exporting countries 17 April (yesterday) failed to agree on keeping production at current levels. The price of Brent was down by more than 4% before the carbon market opened today.The German front year power lost 1.5% in today's opening and pushed the dark spread deeply below 3 euro.

After this "shock" from Sunday, the abundant auction supply might also weigh on the price this week with 17 million EUAs to be offered in five auctions.

In addition, the market is waiting for the first draft report of the European Parliament's industry committee about the post-2020 reform proposals of the European Commission. Although the ITRE is not the lead committee of the reforms, it will be interesting to see how much ambition they show. We have seen in the past that this committee tried to protect industrial sectors from higher carbon prices.

The question of the week is if the small compliance buyers are able to counterbalance all these negative factors.

From the technical analysis’ point of view the price was not able to hit any new local high since 12 April, but it is consolidating after a short rally. The first resistance levels are last week’s high at 5.67 euro and the upper Bollinger band at 5.78 euro.

To the downside the former resistance at 5.35 euro and the moving averages could work as supports (20DMA at 5.21 euro, 30DMA at 5.13 euro, 50DMA at 5.08 euro).

 Source: Bloomberg L.P.

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