Monday, March 27, 2017

EUA Dec17: Bears lining up in view of several risk factors

Last Friday's sell off pushed the price of the EUA Dec17 to a new two-month low.
After seven consecutive sessions in neutral territory, the front year carbon contract broke through its comfort range and tested the downside last Monday. Prices fell below 5 euro for the first time in a month after bearish developments in other energy markets and a weak auction result. The EUA Dec17 contract closed the session at 4.99, 0.15 euro (-2.9%) lower than previous Friday’s close.
After opening at 5 euro (1 cent above Monday’s settlement price), the benchmark carbon contract fell to a daily minimum of 4.93 euro on Tuesday. Most of the day the price traded range bound between 4.93 and 4.97 euro, to finish at the lower edge of the range, at 4.94 euro.
The option strike price gravity and the strong auction helped the benchmark carbon contract to reverse from the February low at 4.85 euro on Wednesday. The price was lifted to a daily maximum of 5.02 euro, but it was not able to stay above this level. By the end of the day, the price returned below 5.00 euro and closed at 4.97 euro. This level still represented a gain of 3 cents of 0.6% compared to Tuesday’s settlement price. The traded volume was also exceptionally high (due to the option expiry) with more than 20 million allowances traded in the benchmark contract only (compared to the March average 12.7 million).
EUA prices continued to trade in a tight range on Thursday. The Dec17 contract opened the day at 4.97 euro, then held around the 5 euro level throughout the rest of the day. The bellwether contract tested intraday high at 5.05 euro before closing the session at 4.98 euro, up 0.01 euro day on day and leaving a doji candle.
On the last trading day of the week, the benchmark carbon contract opened at 5.03 euro and fell continuously during the day. In the afternoon the price hit a new two month low at 4.71 euro, breaking below the key support at 4.85 euro. The settlement price at 4.77 euro represents a loss of more than 7% from the previous Friday.
The price landed in a vacuum on Friday and the next support level is at 4.61 euro, the 2017 minimum. At the moment we see the following reasons that might push the price towards the next support levels:
  • Although the number of auctions remains the same than last week, the volume offered increases as the Polish auction on Wednesday also offers allowances from a cancelled 2016 auction. 
  • The European Commission will publish updated information about 2017 free allocation on Friday, 31 March. The last update showed that Italy and Spain are the countries owing the most allowances to their installations. The Italian authority, however, published last week a decision (delibera) about the 2017 free allocation, which generally signals that the distribution of the free allowances is about to start.
  • Installations in the EU ETS have to report their 2016 verified emissions by Friday, 31 March. The market consensus is that due to a higher gas use in power generation emissions declined sharper than the linear reduction factor of the overall ETS cap (1.74%) resulting in an increase of the surplus allowances.
  • This is the week, when the UK triggers Article 50 of the Lisbon Treaty and starts Brexit negotiations with the EU officially. It is still uncertain how Brexit affects British companies' ETS membership.
  • Last, but not least, global investor mood soured after US President Trump was not able to convince his own party members to abolish Obamacare. His defeat increased scepticism about the other reforms that he promised during his election campaign and that lifted stock indices to record levels.

From the technical analysis' point of view, the space is open for the EUA Dec17 to test the support levels at 4.62 euro (2017 low) and at 4.01 euro (December 2016 low). The relative strength index (RSI) is in neutral territory, at 37 leaving space for further declines.   

Source: Bloomberg, ICE

Monday, March 20, 2017

EUA Dec17: Consolidation around the 200-day moving average

The benchmark carbon contract moved in a narrow range between 5.09 and 5.25 euro last week, but could not get away from the 200DMA (now at 5.13 euro).
After opening 1 cent below previous Friday’s closing level, the EUA Dec17 fell to a daily minimum at 5.09 euro last Monday. By the end of the day, however, it managed to recover and closed at 5.16 euro, a loss of just 0.2%. The price moved in a narrow range of 10 cents during the day. It left a doji candle indicating uncertainty of market participants.
The benchmark contract opened with a 2 cents gap up on Tuesday. The price jumped to a daily high at 5.23 euro in the morning, but moved in a narrow range of 14 cents later during the day. Although it touched Monday’s low at 5.09 euro, it did not hit a new local minimum. The price settled at 5.11 euro, 5 cents below Monday’s close (-1.0%). The loss pushed the MACD into negative territory which is a negative signal.
After testing the support level at 5.09 euro for the third time, the lack of auctions and the higher power prices helped the EUA Dec17 to climb to the 20DMA on Wednesday. The price reached a daily maximum at 5.25 euro and finished the day just 5 cents lower (+1.8% d/d). The traded volume of 8.2 million, however, remained below the February average of 10.4 million.
The benchmark carbon contract moved between the same daily minimum and maximum levels on Thursday than it did on Wednesday. Interestingly, the 5.09 euro level kept the price from falling for the fourth day already. After Wednesday’s white candle, however, a black one followed on Thursday. The price lost 5 cents (-1.0%) by the end of the day.
On Friday, the price moved in an even narrower range of 5.10 and 5.20 euro, to finish at the lower edge of the range, at 5.14 euro.
The price consolidates at the 200DMA and most of the technical signals do not point into a certain direction. The RSI is in a neutral territory (at 47) and the price moves between the two Bollinger bands. The only exception is the MACD that slipped below the zero line last week providing a bearish signal.
Fundamentals are also rather pointing downwards:
There will be five auctions this week, increasing the supply of allowances by more than 4 million in a weekly comparison. Most of the installations are covered for 2016 (meaning low compliance demand), while mild temperatures and cheap gas might dent the appetite of utilities as well. This might result in weak auction results this week.
All in all, we see more signals pointing downwards, but price levels around 5 euro are appealing enough for many companies to purchase allowances for future years when they might face higher prices due to the reform of the EU ETS. Our base range for this week is between 4.85 and 5.49 euro.

Source: Bloomberg, ICE

Monday, March 13, 2017

EUA Dec17: Four black candles pushed price back to 5 euro

The benchmark carbon contract produced four black candles last week and the last, white candle is also very tiny. The price returned to pre-Council meeting levels and fell below key support levels.
On the first day of the week the benchmark carbon contract consolidated above 5.50 euro. After opening at 5.55 euro, 5 cents below last Friday’s settlement price, it hit a new intra-day high at 5.59 euro (a local high from January). The EUA auction failed to show direction to the price, but energy fundamentals were rather bearish and Commission data showed that more than half of the 2017 free allowances have been distributed. As a consequence, the EUA Dec17 turned lower and finished the day at 5.49 euro, a loss of 2.00% or 11 cent.
The benchmark carbon contract remained stable for most of the day on Tuesday, but the last hour of trading brought sellers to the market who pushed the price to a new 4-day low.
Low gas prices (at 3-month low), high supply of allowances (free allocation and auctions) pushed the price of the EUA Dec17 further down on Wednesday. The price of the benchmark carbon contract returned to the pre-Council levels and to the 20DMA.
Thursday started in a negative mood for the EUA Dec17 again. The price fell steeply already in the first hour of trading and hit a new March low at 5.08 euro. There was no recovery by the end of the day and the price lost 11 cents of 2.1% in a daily comparison. The price fell below the key moving averages which will work as resistances in the future. In addition, the positive signal from the MACD was short lived. On Thursday it slipped below the signal curve warning about further possible losses.
On the last day of the week, we could see a small correction in the carbon price. After a surprisingly strong auction the benchmark carbon contract closed the day with a gain of 4 cents.
It seems that the positive momentum seen after the Council meeting is vanishing. The daily price range is narrowing again, just like we saw it before the Council meeting. In the lack of special carbon market events we expect the price to consolidate near the current levels. The first support might be the local low at 4.85 euro, followed by the 2017 minimum at 4.62 euro. Beside low prices in the energy mix (power, oil and gas) some important macro events might also have a negative impact on markets globally and the carbon market might be also affected. The US Federal Reserve is expected to raise interest rates by 25 basis points at its meeting on Wednesday. In addition, there is a chance that the British Prime Minister triggers Article 50 this week, starting officially the Brexit process.
On the other hand, levels near 5 euro are already appealing enough for many market participants to place their bids there. To the upside, the moving averages that represented a support two weeks ago, are now the first resistances.

 Source: Bloomberg, ICE

Monday, March 6, 2017

EUA Dec17: Carbon price hit 2-month high

The ambition showed by the Council regarding the reform of the EU ETS pulled the benchmark carbon contract to a new 2-month high last week.
The EUA Dec17 opened 4 cents above the previous Friday’s settlement price, but declined continuously on Monday to close at 5.20 euro, just 1 cent above the support level represented by the 200DMA. Although the fact that the 200DMA kept the price from falling further, the two last candles formed a bearish engulfing which was a negative sign. Market participants were cautious ahead of the key meeting of the Council of the European Union on the next day and feared that member states would not be able to strike an agreement. 
Depending on the headlines coming from the meeting of the European Council, the EUA Dec17 remained volatile on Tuesday. As the member states had agreed in the last hour of the trading session, the price finished the day with a gain of 0.8%. The hesitation of the market participants during the day was demonstrated by the doji candle the price left on Tuesday.
The agreement of the Council that leaves less flexibility between the free allocation and the auction share, proposes the cancellation of allowances after 2024  and the lack of auction supported the price on Wednesday. After Tuesday’s doji candle the EUA Dec17 moved upwards on Wednesday and gained 13% in a daily comparison. The price hit a daily maximum at 5.94 euro, a level not seen since the beginning of the year and managed to close just 3 cents below the daily high. The rally lifted the price above several resistance levels (which will work as supports in the future), but also above the upper Bollinger band. The 30DMA has been lifted above the 200DMA and the MACD climbed above the zero line that brightened the outlook for the next days.
On Thursday, despite hitting a new local high at 6.02 euro in the morning, the EUA Dec17 gave back almost all its gains from Wednesday. The price closed at 5.47 euro, a loss of 44 cents or 7.4%.
The price opened at the previous settlement level on Friday and after hitting an intra-day low at 5.42 euro, it recovered and closed the day at 5.60 euro, a weekly gain of 3.9%.
Despite the fact that the price was not able to hit a new local high on the last trading day, the technical picture is positive. The 20 and 30DMAs climbed above the 200DMA and the MACD reached the positive territory last week. The RSI is in neutral territory leaving some room for further appreciation. The only warning signal is that the price closed close to the upper Bollinger band at 5.68 euro.
We expect the price to consolidate at higher levels than it did in January and February. Our base range for the week is between the moving averages (5.20 euro) and last week’s high at 6.02 euro.
Expectations about ambitious reforms and some compliance interest will continue supporting the carbon market. The higher auction volume (5 auctions this week with a volume more than 4 million higher than last week) and the 2017 free allocation, however, might limit gains.