Monday, August 29, 2016

EUA Dec16: Support of low auction volumes will vanish soon

After a volatile start, the EUA Dec16 had a calm week. The lack of auction supply supported the price, but the weak energy mix (especially the worsening dark spread) put a cap on the gains.
Despite the initial hesitation the EUA Dec16 gained 13 cents (+2.7%) on Monday. The benchmark carbon contract opened one cent above the settlement price of the previous Friday, but slipped quickly to an intra-day low at 4.70 euro, just one cent above the 30DMA. The price reversed direction as some market participants realized that there is really no EU auction this week. The price hit an intra-day high at 4.91 euro, a level not seen since 15 August. The traded volume of 5.4 million remained below last week’s (already low) average of 7.6 million.
The benchmark carbon contract opened 1 cent above Monday’s settlement price and increased to 4.95 euro, before turning down on Tuesday. As the energy fundamentals did not support the price, traders took profit. The EUA Dec16 fell back to an intra-day low at 4.65 euro and closed at 4.71 euro (-3.9%). The resistance at 5 euro proved strong enough to turn back the price lower. The last two candles in the chart built a bearish engulfing signalling the weakness of the price and decreasing the chances that it would be able to break the resistance at 5 euro.
The EUA Dec16 moved in a narrow range between 4.71 and 4.65 euro in the first hours of trading on Wednesday, but a strong UK auction reversed the price that reached 4.75 euro in the early afternoon. The strong dollar and the falling Brent, however, pushed the price down lower again towards 4.65 euro. The depreciation fastened on the US crude inventory data and the price hit a new intra-day low at 4.55 euro. It closed the day at 4.61 euro, down 10 cents or 2.1%.
After opening 3 cents above Wednesday’s settlement price the EUA Dec16 slipped briefly to an intra-day low at 4.58 euro on Thursday. The price recovered by noon. The 20 and 30DMAs at 4.70 euro halted the appreciation for a short time, but higher oil and gas prices helped breaking above the moving averages. The price hit an intra-day high at 4.73 euro and closed at 4.71 euro, above the moving averages (+10 cents of 2.2%).
The appreciation on Thursday lifted the 20DMA slightly above the 30DMA, but the positive signal was not followed by a rally on Friday. The price managed to climb above the moving averages, but the Fibonacci level at 4.76 euro halted the price increase.
Both the relative strength index and the MACD became horizontal lines in the recent days. For the last summer week we therefore remain neutral for the carbon price and keep our base range of 4.50 and 5.10 euro.
The lack of auctions might this week still support the price, but the period of low auction volumes ends on Friday. 
The support from the energy mix is vanishing as well. Investors believe less and less in the OPEC countries agreeing on a production freeze at their meeting end of September. And even if they agree on limiting their output at current levels, it would mean fixing it at near record high levels while the demand is expected to decline as the summer holidays / driving season ends.
Increasing expectations of a US rate hike still in 2016 will strengthen the USD and make the coal more expensive for the European utilities. Another bearish factor for the carbon price.

 Source: Bloomberg L.P.

Monday, August 22, 2016

EUA Dec16: What is the reduced auction volume enough for?

As most of the market participants were on holidays, the EUA Dec16 remained within a narrow range of 6 cents between 4.87 and 4.93 euro in the first half of last Monday. The decline fastened in the last hour of trading and the price fell to 4.75 euro. It seemed that there was nobody to support the price with purchases. The traded volume also reflected holiday mood with 6 million allowances trading in the benchmark contract compared to the August average of 8.4 million. By the end of the day the price managed to recover and closed at 4.81 euro, 1.8% below the settlement price of the Friday before. The closing price was below the 61.8% Fibonacci retracement.
Although only Monday was a public holiday in many European countries, investors remained in a holiday mood on Tuesday as well. The EUA Dec16 moved like on the first day of the week: in a narrow range until the last hour of trading and then declining sharply to hit an intra-day low at 4.69 euro and to close just one cent above this level. The price fell below the 50.0% Fibonacci level at 4.76 euro.
The EUA Dec16 intensified its decline on Wednesday. Despite opening 2 cents above Tuesday’s settlement price, the benchmark contract declined continuously during the day. Not even the better than expected US crude oil inventory data could stop the fall. The price plummeted to an intra-day low at 4.48 euro, meaning that it fell below the 20 and 30DMAs and also below the 38.2% and 23.6% Fibonacci levels. It lost 4.5% in a daily comparison.
In the first three days of last week the price broke below four Fibonacci retracements. The movement might have been too fast and a correction followed in the last two days of the week.
The depreciation of the first three days of the week was followed by a correction on Thursday. Helped by the improving dark spread and the Brent price above 50 USD, the EUA Dec16 appreciated by 4.5% (20 cents). It climbed above the 20 and 30DMAs in the afternoon.
The price rally continued on Friday, when the price hit an intra-day high at 4.85 euro. The EUA Dec16 was, however, not able to maintain its gains and fell back to close at 4.78 euro (+1.9%).
The rally of the last two days cancelled the losses of Wednesday and Tuesday, but the benchmark carbon contract was not able to climb back to Monday's opening levels. As a consequence, the EUA Dec16 lost 2.7% in a weekly comparison.
The relative strength index (RSI) remained in the neutral territory, but the rally of the last two days of the week lifted the MACD close to the zero line.
As EU auctions have been cancelled, there will be only two auctions this week. The UK will offer 1.7 million allowances on Wednesday on ICE and Germany auctions a similar volume on Friday on EEX.

The benchmark carbon contract might receive support from the auction volume falling by more than 50% this week. 
On the other hand, it's worth mentioning that the market participants had enough time to price in the missing auction volume and we might miss a significant reaction. In addition, there are some downside risks from the fundamental side.
The price of Brent rallied almost 20% since the end of July on speculation, oil exporting countries might agree on joint action in September.  It's getting more and more clear, however, that even if the countries manage to agree on a production freeze, it would mean leaving production near record levels. A similar agreement was expected, but not reached in April, because Iran did just start increasing its production after sanctions against the country had been lifted in January. The vanishing hopes for an agreement or a simple profit taking from the recent rally might push the price of Brent back below 50 USD per barrel and the EUA might slip in tandem.
Thanks to the weak performance of the front year German power, its MACD slipped into negative territory decreasing the chances that the benchmark power contract could support the carbon price. 
From the macro side, all eyes are on the central bankers (especially Mrs. Yellen from the US Federal Reserve speaking on Friday) meeting end of this week in Jackson Hole. Any indication of a rate hike in the US might support the USD versus the euro and have a negative impact on the carbon price as well.
All in all, we  don't expect a huge rally from the reduced auction volume and remain rather neutral on the carbon price for this week. Our base range is between 4.50 and 5.10 euro with the first support seen in the 4.65-4.69 range where two moving averages (the 20 and 30DMAs) and a Fibonacci level meet. The next support is last week's low at 4.46 euro (also a Fibonacci level is near there). 
On the positive side, the first resistance is around 4.85 euro, last week's high and also a Fibonacci level at 4.87 euro. Should the support of the reduced auction volume prove strong enough to pull the EUA price above these levels, the price could retest the 5 euro level.

Source: Bloomberg L.P.

Monday, August 15, 2016

EUA Dec16 climbed back to 5 euro helped by the appreciation of Brent

Helped by the rally in Brent and the reduced auction supply, the EUA Dec16 gained 3.6% last week.
The EUA Dec16 opened at previous Friday’s settlement price of 4.73 euro on Monday. After a short hesitation which pushed the price to an intra-day low at 4.67 euro, the benchmark carbon contract increased steadily to reach 4.96 euro, a level not seen since 18 July. 
Although the price opened relatively strong on Tuesday, negative signals from outside the carbon market pushed the EUA Dec16 on a declining slope. The price hit an intra-day low at 4.80 euro. The last hour of trading, however, brought some buyers to the market and the price jumped back to close at 4.88 euro. By the end of the day the benchmark carbon contract settled down 1.4%. 
The price extended losses on Wednesday. It closed down 2.3% from Tuesday’s settlement price, just 2 cents above the daily minimum. 
The EUA Dec16 had a quiet day on Thursday. Until the last hours of the day it moved in a tight range of 9 cents, between 4.72 and 4.81 euro. The price received negative signals from the energy mix in the morning, but the jumping oil prices supported it later in the day. By the end of the day the price climbed back to Wednesday`s closing level and finished the day unchanged. 
The daily trading range was even narrower on Friday. The benchmark carbon contract opened at 4.88 euro, the settlement price of the two previous days before falling to an intra-day low at 4.82 euro. Despite the intra-day weakness the price closed 0.4% higher thanks to the rally in the price of Brent.
In the last four days the price consolidated close to the 5 euro level, between the Fibonacci retracement at 4.76 euro and the August high at 4.97 euro. 
The hesitation below 5 euro pushed the 20DMA below the 30DMA again which can be considered as a bearish sign. This can be reinforced by the weak dark spread that holds utilities back from the carbon market. 
In a negative scenario, the price could be supported by the Fibonacci level at 4.87 euro (also the 4.88 euro was three times opening or closing price last week) and another one at 4.76 euro. The next strong support is seen at the 30 and 20DMAs at 4.67 euro.
On the other hand, the RSI is in neutral territory (at 55) and the MACD very close to climb above the zero line which leaves some room for further appreciation. 
The reduced auction volume and especially the fact that there won`t be any auction on behalf of the EU next week, might keep the EUA price near the 5 euro level. 
Expectations on an oil production cut by the OPEC countries might provide additional boost to the commodity prices and therefore to the EUA as well. 
Should the supportive factors above lift the price towards 5 euro, it has to break the August high at 4.97 euro first, before it could retest the July high at 5.08 euro. 
Our base range for this week is therefore between 4.50 and 5.10 euro.

Source: Bloomberg L.P.

Monday, August 8, 2016

EUA Dec16: First week with low auction volume lifted the price

Last week was the first in August with a reduced auction volume. The lower supply lifted the price of the EUA Dec16 by 6.77% in a weekly comparison. The benchmark carbon contract also received support from the correction in Brent.
After a relatively strong start, the EUA Dec16 turned lower Monday morning. The support level at 4.38 euro halted the decline at the time of the auction and the price climbed slightly higher. Sellers, however, pushed down the price in the last minutes of trading to the intra-day low at 4.38 euro. This was also the price where the benchmark contract closed the first trading day of the week.
As Brent gave back its morning gains and the WTI fell below 40 USD per barrel on Tuesday again, the EUA Dec16 turned lower as well. The price hit a new one month low at 4.30 euro, just 2 cents above the 2016 low. The price started recovering after the press conference of the Japanese PM with the governor of the Bank of Japan when they announced new measures to boost their economy. The announcement reversed the Brent which helped the EUA price. Tuesday’s candle was a long legged doji which often signals a shift in trend.
The EUA Dec16 opened 2 cents below Tuesday’s settlement price and fell quickly to an intra-day low at 4.37 euro on Wednesday, but it climbed higher in tandem with correcting Brent. The rally fastened when traders realised that there was no EUA auction on Wednesday. The price hit an intra-day high at 4.65 euro, a level not seen since 28 July and it closed just one cent below that level. It also climbed above the short term declining trend line, although with a very low volume of 8.7 million allowances.
Near 4.65 euro there were the 20 and 30DMAs and a Fibonacci retracements which together represented a strong resistance on Wednesday, but were all broken on Thursday when the carbon price received support from the reduced auction volume, the improving dark spread and the rate cut of the Bank of England.
On Friday, the contract opened at 4.66 euro on Friday, 4 cents below Thursday’s settlement, but increased continuously during the day. The appreciation intensified after the strong German auction. The price hit an intra-day high at 4.85 euro, a level not seen since 19 July. More than 1% of the gains could be kept until the market closed and the price remained above the declining trend line.
Another positive signal is that the 20DMA crossed the 30DMA.
The price might get further support from the reduced auction volume next week. Should the correction in the price of Brent continue, it might be another positive factor for the EUA price. 
In a positive scenario, the price has to break last Friday's high at 4.85 euro first. After this level, the next resistance is the Fibonacci level at 4.87 euro. If the price proves strong enough to climb above 5 euro this week, it could even retest the intra-day high at 5.08 euro from 18 July.
On the negative side, it’s worth mentioning that the dark spread is still too low to motivate utilities. Should the price fall back, it could find support from a Fibonacci line at 4.65 euro, the 20DMA at 4.64 euro and the 30DMA at 4.63 euro. If these three supports are not strong enough to halt declines, the price could retest last week's low at 4.30 euro.

Source: Bloomberg L.P.