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

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