Monday, October 10, 2016

EUA Dec16: Consolidation after filling the Brexit gap

Supported by rising power and gas prices, the EUA Dec16 gained almost 15% and even touched 6 euro last week.
The EUA Dec16 opened with a 6 cents gap up at 5.02 euro and climbed continuously last Monday to hit an intra-day high at 5.39 euro. The price didn’t trade this high since the Brexit referendum. The 200DMA, however, stopped the appreciation (for the second time in 3 days).
Despite opening with a 5 cents gap up Tuesday morning,  the price was not able to maintain its gains. From its 5.36 euro opening price it slipped continuously during the day. The lowest level hit was 5.11 euro, but it recovered by the end of the day. It closed at 5.21 euro, a loss of 10 cents or 1.9%. For the third time, the 200DMA at 5.37 euro stopped the appreciation.
The positive signal received from the 20DMA crossing the 30DMA got confirmed on Wednesday. The price opened with a spectacular 12 cents gap up. After some hesitation in the morning hours, the price jumped above the 200DMA at 5.36 euro (for the first time since January) and rose to an intra-day high at 5.52 euro. This way the price reached the intra-day low on the day before the Brexit referendum (5.50 euro) which made some market participants think that the gap left after the referendum has been filled. The real upper edge of the gap was however the 5.65 euro level (the closing price on the day of the referendum) which left some space for further gains. The price received support from a stronger than usual UK auction, the continuing rally in the commodity prices and a surprising decline in the US crude oil inventories.
Despite opening with a 4 cents gap down at 5.44 euro, the EUA Dec16 appreciated step by step on Thursday. It broke several resistance levels, filled the gap left after the Brexit referendum and climbed even above 6 euro. The highest level hit during the day was 6.09 euro. It closed, however, below 6 euro, at 5.86 euro as profit taking started late in the afternoon.
The decline continued on Friday, but the 5.50 euro level proved a good support during the day.
Despite the correction in the last 1.5 days the increasing trend is still valid. 
Should power and / or oil prices support the carbon this week, the next resistance after last week’s high at 6.09 euro is a local high from June at 6.38 euro.
High cover ratios in last week's auctions and an increasing volume traded in the Dec17 and Dec18 contracts suggest that utilities increased their activity. This might be supportive for the carbon price.
Political activity might increase the volatility in the carbon market, but not in the usual way. 
Although the European Parliament's industry committee votes about the post-2020 reform of the ETS, we do not expect major surprises from the event as the compromise amendments of the four biggest political groups are known.
But oil exporting countries will meet again, this time in Istanbul. Should the countries surprise markets with an agreement about the details of the oil production cut (they agreed on last month in Algiers), the market might react in a positive way. (Especially, after Russia saying last week that it only goes to Istanbul for negotiations, but not for a deal.)
If the correction continues (as the RSI is still very close to overbought territory), the first strong support is the 200DMA at 5.32 euro followed by the psychologically important 5.00 euro level.
All in all, we expect the price to consolidate between the 200DMA and last week's high in the next couple of days.

 Source: Bloomberg L.P.

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