Monday, December 19, 2016

EUA Dec16: ENVI proposals and power prices lifted the price of allowances

The ambitious reform proposals adopted by the environment committee of the European Parliament and the higher German power prices (+8.9% w/w) lifted the price of the EUA Dec16 by 10.5% last week.
The agreement between OPEC and non-OPEC countries the previous Saturday to reduce oil production by an additional 558k barrels per day from January and the strong auction result gave wings to the EUA Dec16 on the first trading day of the last week. The price hit an intra-day maximum of 4.81 euro, a level last seen 30 November.
As the market participants were waiting for news from the ENVI negotiations, the EUA Dec16 moved in a tighter than usual daily range on Tuesday. Although it slipped to a daily minimum of 4.70 euro, it did not fall back into the declining trend channel from November. The increase in the afternoon, on the other hand, was capped by the 20DMA. The price closed at 4.79 euro, approximately at the middle of the daily range. The relatively strong price lifted the MACD above the signal curve on Tuesday, which was a bullish signal.
After the shadow rapporteurs of the post-2020 ETS reform reached a compromise Tuesday evening, the EUA Dec16 opened with a gap up Wednesday morning. The price jumped to an intraday high at 5.19 euro in the first minutes of trading (almost reaching the 200DMA), but retreated quickly to the 5 euro level. The cancelled UK auction pushed the benchmark contract to a daily minimum of 4.88 euro, but the shock didn’t last long and the price targeted the 5 euro level again in the afternoon. By the end of the day the price was at 5.01 euro, up 22 cents or more than 4% from Tuesday’s settlement price. The candle looked like a doji, indicating the hesitation of investors before the key vote in the environment committee of the European Parliament on the next day.
As the outcome of the ENVI vote did not cause major surprises, the benchmark carbon market remained stable around 5 euro on Thursday. The preference of a higher linear reduction factor lifted the price to an intra-day high of 5.14 euro. This was, however, still below the Wednesday high, because market participants are aware of the preference of the member states for a 2.2% linear reduction factor, as proposed in October 2014. The weak auction then pushed the price to a daily minimum at 4.83 euro. By the end of the day many investors decided to take profit and the EUA Dec16 lost 17 cents or 3.4%.
The depreciation continued on Friday to 4.57 euro. In the afternoon, however, bulls invaded the trading floor and lifted the price to 5.00 euro again.
The European member stated continue debating the reform of the EU ETS this week. They were challenged by the ambitious proposals of the MEPs in the environment committee. As a consequence, market might wait further for the final position of the European Council. (Although it was scheduled for 19 December). Any news from the negotiations in the Council can increase the price volatility this week as there are not many other events that could impact the carbon market.
The price of the allowances might be supported by the fact that there won't be any auctions this year anymore. Daily auctions will resume 9 January.
We expect the price to consolidate around 5 euro before the Christmas holidays.

 Source: Bloomberg L.P., ICE

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