Monday, November 28, 2016

EUA Dec16: Sharp losses on bearish technicals

The weak energy complex pushed the EUA Dec16 down to a new local low at 5.31 euro on Monday. When the price fell below the support of 5.38 euro, the decline got faster as many stop-loss orders might have been triggered. The price, however, didn’t reach the 200DMA at 5.24 euro (also a Fibonacci level). A correction started in the afternoon and the price appreciation got faster when the news first appeared about the rapporteur of the post-2020 reforms to propose ambitious changes to the MSR. By the end of the day the losses have been reduced to 10 cents or 1.8% and the price returned into the comfort zone between 5.40 and 6.10 euro.
The benchmark carbon contract moved in a narrow range of 11 cents on Tuesday. The intra-day range was the narrowest since 13 September showing the hesitation of the price about which direction to take. The price closed just 3 cents higher (+0.5% d/d), but the decline of the last days pushed the MACD into negative territory, which is a bearish signal.
After opening 3 cents below Tuesday’s settlement price, the EUA Dec16 reached an intra-day high at 5.64 euro on Wednesday, before falling back to 5.35 euro in the afternoon on news about the restart of a 900MW French reactor.
Pushed down by a weak auction result and expensive coal, the benchmark carbon contract declined to an intra-day low at 5.21 euro on Thursday. By doing so the price fell below the 200DMA and a Fibonacci level. By the end the day the price was able to recover and closed at 5.36 euro, down by 4 cents or 0.7% only.
The negative signals (MACD below zero, price falling below the 200DMA) proved right and the EUA Dec16 dived below 5 euro on (Black) Friday to hit an intra-day low at 4.94 euro, a level last seen in September. By the end of the day it managed to climb back to 5 euro, but not above the 200DMA. The list of the negative signals has been expanded by another one: the 20DMA fell below the 30DMA.
Taking into consideration all the above, we expect the price to fall further, although the several meetings of this week represent a risk to the price that can result in a high volatility. 

The Council’s working party on the environment continues discussing the post-2020 reforms of Wednesday. Also the shadow rapporteurs of the ENVI committee will debate the same topic this week. Any leaked information from these meetings can increase the volatility of the EUA price.
The European Commission will present its energy union package, including proposals to update the energy efficiency and renewables directives to align  them with the 2030 climate and energy framework, as well as a proposal to redesign of EU's electricity market on Wednesday. Higher ambition in these fields would affect the carbon price negatively.
The OPEC meeting on Wednesday is not directly related to the carbon market, but as we could observe a high correlation between the two commodities, the outcome of the meeting in Vienna might also have an impact on the EUA price.
Last, but not least, the auction volume increases to almost 18 million allowances this week adding pressure on the price. (In addition, the 2017 auction calendars published last Friday show that the supply will increase significantly in a yearly comparison.)
All in all, we are rather bearish for this week, but due to the heavy losses of the last week the price might simply consolidate around 5 euro.

Source: Thomson Reuters, ICE

Monday, November 21, 2016

EUA Dec16: Low coal prices couldn't save the carbon price from losses last week

The chart of the EUA Dec16 showed a nice pattern of days with decreasing and decreasing prices this week. By the end of the week, however, the benchmark carbon contract lost 1.6%.
The price opened stable last Monday, but it turned lower when the components of the energy mix turned red. The price fell below the support level at 5.48 euro, and even tested the next support at 5.38 euro. The price closed with a loss of 4.6% or 26 cents.
The correction in the energy mix did not leave the carbon market untouched on Tuesday. The price opened with a three cents gap to Monday’s settlement price and despite falling to 5.42 euro, it didn’t close it and left 1 cent, which will work as a support. After climbing higher the whole day long, the price finished the day at 5.74 euro, a gain of 33 cents or 6%. 
The price moved in a wide range of 39 cents on Wednesday. The support at 5.48 euro worked well, but the price closed with a loss of more than 3%.
The afternoon rally in the energy mix and the strong auction pulled the EUA Dec16 higher on Thursday. The news about the Chinese government abolishing earlier limits on coal mining pushed coal prices lower which had a positive effect on the carbon market. After reaching and breaking the resistance level at 5.80 euro, some stop-loss orders might have been triggered and the price rallied to an intra-day high at 5.93 euro. By the end of the day the price managed to keep its gains and closed 35 cents above Wednesday’s settlement price.
After the rally on Thursday, the benchmark carbon contract turned lower on Friday again. Beside the falling German power prices, the weak auction result was an additional factor pushing the price lower to a closing price of 5.58 euro. 
Despite the volatility observed last week, the price seems to consolidate in October’s comfort zone between 5.40 and 6.10 euro. We keep this range as our base range for this week as well, emphasising that the upcoming events might increase the volatility of the price again: 
The UK is expected to provide some insight in the future of the country’s carbon tax on Wednesday. The OPEC should agree on the exact figures of the production cut 30 November. And the ENVI will vote about the amendments to the post-2020 reform proposal of the European Commission 8 December.

Source: Bloomberg L.P.

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.

Monday, November 7, 2016

EUA Dec16: Power rally lifted the price to a 6-month high

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.