Monday, September 5, 2016

EUA Dec16: September auctions weigh on the price

As written in our previous blog entry the reduced auction volume of the last summer week was not able to provide support to the EUA price. We saw only black candles in the chart of the EUA Dec16 last week and the price lost more than 13% in a weekly comparison. Falling oil prices and the further worsening dark spread weighed on the price in the first half of the week, but the biggest shock was brought by the first September auction. 
The EUA Dec16 was captured by the 20 and 30DMAs on Monday as it moved in a narrow range of 7 cents between 4.66 and 4.73 euro. The traded volume was extremely low as many market participants stayed away from the market due to the summer bank holiday. By the end of the day the price returned to Friday’s closing level at 4.70 euro.
The benchmark carbon contract opened 3 cents above Monday’s settlement price on Tuesday and jumped quickly to 4.78 euro, but was not able to keep its gains and fell back sharply in the afternoon when oil price got under pressure from the strong dollar and comments from Iran about increasing its production. By the end of the day the price closed at 4.55 euro, 15 cents (-3.2%) below Tuesday’s settlement price.
After opening 2 cents above Tuesday’s settlement price, the EUA Dec16 jumped to 4.62 euro early in the morning on Wednesday as some market participants thought that the fall the day before was overdone. Before noon, however, the price already turned back to the daily minimum. The decline got steeper in the afternoon, after US crude inventory data were released. The price fell to 4.40 euro, breaking the Fibonacci level at 4.51 euro, and the local low at 4.46 euro. By the end of the day the price fell by 1.8%.
Plummeting oil prices and the further worsening of the German dark spread kept the EUA Dec16 under pressure on Thursday as well. The price opened at Wednesday’s settlement level and climbed above the 4.51 euro Fibonacci level, but was not able to stay there and fell back hitting a new weekly low at 4.36 euro. It closed at 4.38 euro, down 9 cents (-2.0%).
After opening 3 cents above Thursday’s settlement price, the benchmark carbon contract was slipping down continuously on Friday. The fall accelerated after the weak German auction result and the price fell to a new 3-year low at 3.89 euro, triggering many stop-loss orders. Prices below 4 euro, however, invited already some buyers who lifted the price back to 4.08 euro. Still the daily losses reached 6.8%.
For most of August, the EUA Dec16 traded in a range of 70 cents between 4.30 and 5.00 euro. Breaking out to the downside from this range is a negative sign. 
It is difficult to find any fundamental factor that would support the price at the moment. The market remains oversupplied, Industrial installations accumulated a surplus during the years of the financial crisis and as we could see from the recently released quarterly earnings of EU utilities they are largely hedged for this year and the next.
As auction volumes increase five-fold from last week, the question is who will absorb this supply?
The price of Brent got under pressure from the increasing US inventories, fading hopes for a production freeze by the OPEC and the strengthening of the USD versus other currencies. European gas prices fall in tandem with oil, improving gas' comparative advantage to coal. (Coal prices remained relatively high and coal got more expensive due to the appreciation of the USD as well.)
As a consequence, the dark spread feels the gravity of the 1 euro level and as the records of German energy trade group AG Energiebilanzen showed, German natural gas-fired power plants that generate electricity round the clock are making money for the first time in four years. With European gas trading near the lowest since 2010 amid ample supplies, the fuel is gaining an edge against rising prices for more profitable yet twice as polluting coal.

Although there are not many factors that could support the price fundamentally, from the technical analysis point of view the benchmark carbon contract became oversold (RSI at 31). Even the lower Bollinger band is higher (at 4.18 euro) than the current market price. Former support levels, however, work as resistances now, starting with the former 2016 low at 4.28 euro, followed by the local low at 4.46 euro from 18 August. Should the price be able to climb higher this week, it has to face the 30 and 20DMAs at 4.62 and 4.64 euro, respectively.

In a negative scenario, the 4 euro level could represent a minor support, followed by the new 2016 low at 3.89 euro. Below this level we can find local lows from May 2013 as next supports (at 3.76 and 3.36 euro).

Source: Bloomberg L.P.

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