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.

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