The continuing rally in power prices lifted the benchmark carbon contract to a new 6-month high last week.
Although the EUA Dec16 opened with a 2 cents gap downwards last Monday and fell to an intra-day low at 5.76 euro (a Marubozu line), it recovered by the end of the day and closed with a gain of 2 cents or 0.3% in a daily comparison. Considering that there were less market participants present in the market (All Saints' Day bridging), the traded volume was higher than expected. Behind the apparent high volume (13 million in Dec16) there was mainly one significant block trade on Dec16 / Dec17 (rolling positions).
After opening 1 cent above Monday’s closing level, the benchmark carbon contract increased continuously in Tuesday’s trading. Higher power prices and the lack of a daily auction supported the price in a way that it gained 2.2% and closed at 6.03 euro. This was the first time since June that the price managed to settle above the 6 euro level.
Impressed by the higher than 6 euro settlement price on Tuesday, the EUA Dec16 opened 3 cents higher on Wednesday. As the general market mood turned negative during the previous night with some polls showing Mr. Trump taking over the leadership in US Presidential elections, the carbon price ceded the pressure and fell to an intra-day low at 5.86 euro. Record breaking power prices (due to cold winter and reduced renewable generation forecast, limited French nuclear availability) reversed the losses in carbon and the price rallied to a five month high at 6.27 euro. The price jumped from the 5.50-6.00 euro basis it was moving in since the beginning of October.
Higher power prices on limited French capacities available, a strong auction and the expectations on a soft Brexit made the carbon price rally on Thursday. After some initial hesitation the price hit a new 6-month high at 6.62 euro breaking several resistance levels.
It became overbought during the day and it seems that the Marubozu line at 6.58 euro stopped the rally for the time being. The technical indicators suggested that the price is overbought. The RSI was above 70 and the price traded above the upper Bollinger band.
On Friday the price moved between the 6.58 euro Marubozu line and the former resistance at 6.38 euro (which became a support after being broken). Lower German power prices and higher coal prices worsened the dark spread that weighed on the carbon price. In addition, many market participants might have taken profit from the recent rally in carbon prices. (The EUA Dec16 gained 9% in a week.)
The most important event this week that will influence prices all around the world will be the US presidential elections on Tuesday, 8 November. Until the final result is known, volumes might be low and the price might be range bound.
The other factor defining the direction of the carbon price might be still the power market. The German front year power turned lower on Friday and worsened the dark spread. Should this movement continue, it would have a negative effect on the carbon price as well. Any additional outages in the French power sector, however, might reverse the declines.
Our base range for this week is therefore 6.00 and 7.00 euro.
Source: Bloomberg L.P.