Monday, June 27, 2016

EUA Dec16 under pressure from outcome of UK referendum result

Expectations for and result of the UK referendum defined the direction of the EUA price last week.

As the odds for a Brexit declined during last weekend, markets cheered Monday morning. The EUA Dec16 opened 1 cent above the settlement price of the Friday before and rallied until the 20DMA at 5.95 euro. The price was also supported by the German front year power which hit a new 2016 high at 28.80 EUR per MWh. The benchmark contract closed at 5.86 euro, 19 cents (3.4%) above the previous settlement.

Despite the rally on Monday commodities fell sharply on Tuesday. Although plummeting coal prices lifted the dark spread higher during the day, the EUA Dec16 preferred taking direction from the front year German power which gave back all of its Monday gains. The benchmark carbon contract fell to a 2-month low at 5.53 euro (the 100DMA exactly) and closed just marginally higher at 5.56 euro (-5.1%).

Despite the positive signals from surrounding markets (German power, Brent and equities) the price of the EUA Dec16 remained under pressure on Wednesday. It fell to a new 2-month low at 5.50 euro in the afternoon after the publication of the crude inventory data and the new UK poll. In the last 10 minutes of trading, however, bulls (and maybe holders of expiring options) invaded the trading floor and lifted the price higher by some 10 cents. As a consequence, the benchmark carbon contract closed 2.3% higher.

After opening 5 cents above Wednesday’s settlement price, the EUA Dec16 slipped to an intra-day low at 5.56 euro. It recovered slightly later during the day, but it was not able to climb into positive territory and closed the day 4 cents lower. The volume of 9.1 million was lower than the June average of 13 million indicating that traders preferred closing positions and staying at the side-lines instead of opening new ones.

Shocked traders pushed down the price to 4.69 euro Friday morning (-17% d/d) in the first 10 minutes of trading, but still the price didn’t hit a new 2016 low. It recovered later on and consolidated around 5 euro. The price left a gap between 5.24 and 5.65 euro. Gaps generally work as support and resistance levels (this case it will be a resistance limiting gains).
Looking at the bright side, the price didn’t hit a new 2016 low. (The benchmark carbon contract fell to 4.62 euro in February.)

The relative strength index (RSI) fell to 28 on Friday, signalling that the price is oversold. The price also fell below the lower Bollinger band at 5.33 euro which might make traders more optimistic about a recovery.

Support levels are Friday’s low at 4.69 euro and the 2016 low at 4.62 euro.

Should the price climb higher, it has to retest Friday’s high at 5.24 euro and try to fill in the gap. 

Source: Bloomberg L.P.

Monday, June 20, 2016

EUA Dec16: Markets under pressure from Brexit fears

Renewed fears about the UK leaving the EU and worse than expected Chinese investment data pushed all markets down Monday morning and the carbon market was no exception. Despite some recovery during the day the contract closed at 5.86 euro (-1.7% d/d), just 2 cents above the intra-day low of 5.84 euro. As the price broke and closed below the support level at 5.89 euro, the space is open for further declines.

The EUA Dec16 fell hand in hand with other commodities Tuesday morning and hit an intra-day low at 5.74 euro. In the last hour of trading buyers invaded the trading floor and lifted the whole energy mix. German front year power turning positive had a supportive effect on carbon as well. The benchmark contract closed the day at 5.86 euro, flat to Monday’s settlement price. The doji candle indicated the hesitation about which direction to take.

Signals were mixed Wednesday morning with the components of the energy mix trading in the negative territory while stock markets expected to open higher. The benchmark carbon contract opened cautiously before the Fed meeting in the evening. As the market was waiting for the Fed meeting, the carbon moved in a narrow range of 11 cents. By the end of the day, the benchmark contract gained 5 cents or 0.9%.

The carbon market received negative signals Thursday morning (Brent and German front year power in the negative territory, stock index futures in the red). As a consequence, the EUA Dec16 opened at 5.87 euro (4 cents below Wednesday’s settlement) and slipped continuously until 5.82 euro in the first hour of trading. By the end of the day it closed at 5.71 euro, just one cent above the intra-day low at 5.70 euro.

The decline continued on Friday, when the price hit the May low at 5.65 euro. This support halted the decline, but no major recovery could be seen and the price closed just 2 cents above the support.

The risk of the Brexit vote and the huge auction supply might weigh on the price this week until Thursday and the benchmark carbon contract might slip further. The next support below the May (and last week) low of 5.65 euro is the Fibonacci line a 5.56 euro.

Higher power prices and a referendum outcome on the last days of the week showing that the UK prefers staying in the EU, might support the price this week. The first strong resistance to break is at 6 euro.

Source: Bloomberg L.P.

Monday, June 13, 2016

EUA Dec16: Lowed edge of the range might be retested

Helped by the rally in other commodities the EUA Dec16 gained almost 5% on Monday. The price broke above the 20 and 30DMAs. It also broke above the May high at 6.23 euro by hitting an intra-day high at 6.29 euro. The rally lifted the price above the upper Bollinger band (6.22 euro).

The EUA Dec16 had a volatile day on Tuesday as Brent and German power were looking for direction as well. After opening flat to Monday’s settlement price, it lost more than 1% before jumping to a new monthly high at 6.38 euro. It ws not able, however, to keep the gains and closed at 6.12 euro, just 1 cent above its intra-day low.

After another volatile start, the EUA Dec16 consolidated above 6.10 euro on Wednesday. After opening 2 cents above Tuesday’s close, the price fell quickly to an intraday low at 6.04 euro, before jumping to 6.21 euro when the Brent hit a new 10-month high. By the end of the day it closed 1 cent below Tuesday’s settlement price.

The strength from the morning disappeared quickly from the chart of the EUA Dec16 on Thursday. The price fell to an intra-day low at 5.99 euro, where a Fibonacci level halted further losses. Carbon received negative signals from the energy mix with the front year German power and the Brent falling from recent highs. Plummeting coal prices were not able to counterbalance the fall in power. As a consequence, the dark spread worsened further.

With global investor mood getting risk off as the day of the Brexit vote approaches, the EUA Dec16 fell hand in hand with other commodities on Friday. (Or did traders sell in order to be not distracted from the 2016 and be able to focus on their favourite team?) Despite the short lived rally in the last ten minutes of trade the price closed near its weekly low.

With commodities that were overbought earlier in a correction phase, an increased auction volume and many investors being risk-off before the Fed meeting on Wednesday and the UK referendum, the benchmark carbon contract is expected to remain range bound next week as well with higher chances to trade below the 6 euro level. Our base range is 5.70-6.20 euro.

The first support is the 5.70 euro which has been tested three times between 23-25 May. Below this level the May low at 5.65 euro could stop the price from falling further.

To the upside, there are several resistances around 6.00 euro. The 20 and 30DMAs and a Fibonacci retracement can be found there. The next resistance is near 6.20 euro (a local high several times in May) before last Tuesday's intra-day high at 6.38 euro could be retested.

Source: Bloomberg L.P.

Monday, June 6, 2016

EUA Dec16: Range bound trade can be broken by change in prices in energy mix

Despite the bearish tone in the close, the benchmark carbon contract remained relatively stable and range bound last week.

It opened 3 cents above the settlement price of the previous Friday on Monday. It slipped briefly to the Friday’s close at 6.04 euro, but then it started increasing in tandem with German power and Brent. By the end of the day the price closed 1.3% above Friday’s settlement price. The benchmark carbon contract might have received additional support from the fact that there was no auction on Monday. The traded volume, on the other hand, was very low with 1,664 lots trading compared to the May average of  13,400 lots. The reason for the low volume was the bank holiday in Germany and the UK.

AS the report of the ENVI rapporteur Ian Duncan was in line with market expectations and seemed a good compromise that could be adopted smoothly by all political groups of the European Parliament, the EUA Dec16 was little changed during Tuesday’s session, closing at 6.10 euro, some 0.02 euro lower compared to the previous close.

Among negative market mood in the morning due to the weak Asian data and the sell-off in Brent before the OPEC meeting, the EUA Dec16 opened 2 cents below the previous settlement price on Wednesday. The price slid continuously from the beginning of the day and fell below the 20 and 30DMAs to an intra-day low at 5.89 euro. The benchmark carbon contract closed the day with a loss of 2.8%, between the 20 and 30DMAs, but below the 6 euro level.

The EUA Dec16 was kept by the 20 and 30DMAs on Thursday. After opening at Wednesday’s settlement price, the benchmark carbon contract slipped briefly to an intra-day low at 5.95 euro, but then it climbed to 6.08 euro before closing at 6.03 euro.

The two moving averages kept the EUA Dec16 within a 9 cents range until the last minutes of Friday again. The bears invaded the trading floor in the last minutes and pushed the price below the 20DMA. The carbon was not able to follow the other components of the energy mix higher and lost 1.3%.

In lack of political events we expect the EUA price to remain range bound this week. Our base range is 5.65 (the May low) and 6.23 euro (local high from 17 May). 

The price of the benchmark carbon contract might take direction from the elements of the energy mix. The German front year power and European coal prices are overbought. 

German power is actually appreciating because of the higher price of fuels. On the other hand, the more expensive coal is pushing the dark spread lower which is denting utilities' demand for EUAs. A direction change in these commodities might still have an impact on the EUA Dec16 price.

The 20DMA fell below the 30DMA end of May which is generally a bearish signal. In addition, the bearish engulfing from the last two trading days of last week is another warning signal. 

The MACD declined and came close to the zero line. (It crossed the signal curve beginning of May already.) Should it fall below zero, it would be another bearish signal.

Source: Bloomberg L.P.