Monday, October 24, 2016

EUA Dec16: Overbought power might put a cap on carbon's potential gains

The EUA Dec16 closed its sixth week in a row with gains last Friday (+1.38% w/w). 
After opening 1 cent above previous Friday’s settlement price, the EUA Dec16 increased continuously on Monday as it received support from higher power prices, the improving dark spread and a nice auction cover ratio. The benchmark carbon contract reached an intra-day high at 6.04 euro (just 5 cents below the October high), but it was not able to maintain its gains and slipped back to close at 5.87 euro, just 6 cents above the previous settlement price.
The EUA Dec16 opened with a 4 cents gap up on Tuesday. Supported by the news that five French nuclear power plants will be taken off-line in the next three months, the price hit a new 4-month high at 6.14 euro. By the end of the day, however, the price returned below 6 euro.
The benchmark carbon contract opened in a positive mood with a 3 cents gap up on Wednesday, and it increased to an intra-day high at 6.06 euro, but it lost steam very quickly and fell hand in hand with European power prices. It closed the day at 5.67 euro, just one cent above the intra-day low at 5.66 euro. The five white candles of the previous days were followed by a black one on Wednesday. Unfortunately, this last candle had a bigger body than the former one forming a bearish engulfing on the chart.
Although the benchmark carbon contract attempted to climb higher on Thursday, it lost 1.6% by the end of the day. After hitting an intra-day high at 5.78 euro, it slipped lower continuously and fell to an intra-day low at 5.50 euro. By the end of the day it recovered somewhat, but closed only 8 cents above the daily low. The decline of the last two days pushed the price close to the lower edge of the increasing trend channel
The strength of the US dollar and the news about France giving up its plan of the carbon price floor were expected to weigh on the price on Friday, but the negative effect did not last long. The price opened with an 8 cents gap down, but reversed its direction quickly to jump to an intra-day high at 5.95 euro. The price was able to keep its gains until the last minute of trade and finished 5.6% higher.
Friday’s candle formed a bullish engulfing and lifted the price back above the lower edge of the increasing trend channel. (See the chart below.)
Should the positive effect of the increasing power prices persist, the EUA Dec16 could climb above 6 euro again this week. 
On the negative side, both power and carbon markets are already in or close to overbought territory, which increases the probability of a correction. The German front year power touched the 200DMA last Friday for the first time since 2011 and its RSI is at 74 (overbought). 
We therefore remain cautious for this week. Our base range is therefore between 5.40 and 6.14 euro.

 Source: Bloomberg L.P.

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