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.

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