Monday, September 26, 2016

EUA Dec16: Auction cover ratios and political debates in focus this week

The EUA Dec16 had a volatile day on Monday. After opening 4 cents above last Friday’s settlement price, it fell by 3.7% to an intra-day low at 4.20 euro, but it recovered in the afternoon and closed the day with a gain of almost 1%. On Monday it was again the 30DMA which halted the rally, just like the Friday before. Monday’s candle was a doji, showing uncertainty in the market about which direction to take.
The EUA Dec16 opened one cent below the previous settlement price on Tuesday. For a short time it was able to touch the 4.40 euro level, but fell then continuously. It broke below the 20DMA, the earlier support at 4.28 euro and Monday’s intra-day low at 4.20 euro could not halt the depreciation either. By the end of the day it closed at 4.16 euro, 24 cents or 5.0% below Monday’s settlement. The price cancelled almost all the gains of the previous two days. The 10-minutes chart of the benchmark carbon contract shows a double top. If the pattern is right, the price might test the support level at 4.00 euro.
The benchmark carbon contract moved in a narrow range on Wednesday, as investors stayed at the side lines of the market before the rate decision of the US Federal Reserve. Despite opening 4 cents above Tuesday’s  settlement price, the 20DMA limited gains. By the end of the day, the price gained 6 cents.
The decision of the Federal Reserve gave wings to all markets and switched investors in risk-on mode. The EUA Dec16 opened with a gap up on Thursday and appreciated continuously during the day to hit a local high at 4.46 euro. The price kept its gains until the market closed at finished the day at 4.42 euro.
The rally continued on Friday, when the price reached a new September high at 4.69 euro, a level not seen since 30 August. AS the German front year power hit a one month high, the dark spread jumped above 2 EUR/MWh for the first time since the beginning of July. The benchmark carbon contract gained more than 4% in a weekly comparison.
Despite the jump of the last two days the relative strength index (at 56) leaves room for further appreciation. 
There will be only four EUA auctions this week offering a total of less than 15 million allowances, as on Wednesday 0.7 million EUAAs will be auctioned on behalf of the EU. The last two auctions had a cover ratio above 2, which might be a positive signal that utilities are back in the market and hedging their production.
The environment committee of the European Parliament will debate the amendments submitted to the report of the rapporteur Ian Duncan about the post-2020 reform of the EU ETS on Thursday. Should the discussion show support for higher ambition, it might support the price of the benchmark carbon contract. 
One of the most expected events of the carbon market is the General Assembly of the International Civil Aviation Organization (ICAO) starting on Tuesday. The ICAO might reach a historical agreement about how to limit aviation emissions from 2021. This would be the first worldwide sectoral regulation of emissions. Although it seems likely that the scheme would be voluntary in the beginning, market participants focus on the list of eligible units. Should EUAs and CERs be part of the list, their prices might show a positive reaction.
AS the price of carbon tends to show a certain correlation with the price of oil, the International Energy Forum in Algiers in the firts half of this week might have a special importance for the carbon market. Should the oil exporting countries be able to surprise markets with an agreement about coordinated action to support the price of oil, this could be supportive for the EUA price as well.
In a positive scenario, the EUA Dec16 might retest last week`s high at 4.69 euro and the following Fibonacci level at 4.72 euro. If these levels get broken the next resistance is the local high at 4.97 euro.
In the case of a correction, the first support level is near 4.40 euro (30DMA and a Fibonacci level), before the 20DMA at 4.23 euro.
After the recent rally we remain cautiously optimistic regarding the price development of the EUA Dec16, keeping in mind that disappointing political decisions (in ENVI, ICAO or OPEC) represent a bearish risk for the price.

Source: Bloomberg L.P.

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