Monday, November 14, 2016

EUA Dec16: Leaving the increasing trend channel

The EUA Dec16 lost almost 12% last week due to falling German power prices, the worsening of the German dark spread and weak auction results.
Although it opened cautiously 2 cents below the previous Friday’s settlement price, the benchmark carbon contract was lifted by higher power prices last Monday. The EUA Dec16 reached 6.60 euro, just 2 cents below the November high. The worsening dark spread, however, weighed on the price in the afternoon and some traders might have closed long positions before the US elections taking profit from the recent rally. As a consequence, the price fell by 18 cents or 2.8%.
The benchmark carbon contract opened at Monday’s settlement price on Tuesday, and fell then continuously to an intra-day low at 5.97 euro. The price got under pressure from the correction in power prices and the low dark spread. It managed to recover in the afternoon, when selling pressure reached the coal as well pushing it down by more than 2%. By the end of the day the EUA Dec16 reduced its losses to 1.3%.
The price opened with a gap of 21 cents down after the day of the US presidential elections. (After the Brexit referendum it left a gap of 41 cents.) After falling to an intra-day low at 5.82 euro (a level not seen for 7 days) the recovery happened on the same day and the morning gap was closed. The price finished above 6 euro and with a marginal loss of 2 cents.
Despite the strong opening on Thursday, the price declined during most of the trading. It fell below 6 euro and consolidated there until the market closed. By the end of the day it lost 21 cents or 3.4% (more than immediately after the election day). The decline pushed the price from the increasing trend channel and also below the 20DMA, a long time support. In addition, the last two candles formed a bearish engulfing increasing the number of negative signals.
And the technical signals proved to be right on Friday, as declining power prices and the further worsening of the German dark spread pushed the price even lower. The price closed the day with a loss of 25 cents and the week with a decline of 12%.
As we don't expect any major political announcements this week, the carbon market might take direction from the components of the energy mix and from the auction results this week.
The number of allowances offered will almost reach 18 million this week, 3.5 million more than last week. In addition, appetite for the allowances seems more dented recently. The average cover ratio of the auctions last week was 2.17, compared to the November average of 2.57. 
Another, rather bearish factor is the decline in power prices (market seems to have digested and prices in the French nuclear outages) and the worsening of the German dark spread. 
With the end of the year approaching, the next rate decision meeting of the Federal Reserve is also coming closer, Despite some uncertainty immediately after the US Presidential elections, the probability of a rate hike increased again by the end of last week. The USD proved surprisingly strong and weighed on the dark spread.
Last, but not least, market also expects the OPEC to agree on the exact numbers of the production cut. Should the Organisation not be able to reach an agreement, it would affect negatively oil, gas and carbon prices.
Should the decline of the EUA Dec16 continue, the price might retest the support level at 5.23 euro (with a local low at 5.48 euro from 21 October being a support before).
In a positive scenario (rather unlikely given the bearish technical and fundamental signs), the price has to break the 20 and 30DMAs first (at 5.97 and 5.83 euro, respectively), before it could retest the psychologically important 6.00 euro level.

Source: Bloomberg L.P.

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