Monday, August 14, 2017

EUA Dec17: Auction volume to decrease further due to public holiday

After a relatively strong start the EUA Dec17 turned lower last Monday morning. The decline accelerated after the auction cleared at a 6 cents discount to the secondary market, and the price hit a daily low at 5.27 euro. The improving dark spread helped the price in recovering until 5.32 euro in the afternoon, but the price turned lower in the afternoon again to finish the day with a loss of 1.3%. To reflect summer mood, the traded volume fell further from the daily average of 7.7 million seen last week to 3.7 million.
The EUA Dec17 contract opened Tuesday’s session at 5.32 euro and traded between 5.25 euro and 5.34 euro, before ending the day at 5.27 euro, where it also closed on Monday. A modest volume of 4 million EUAs were traded.
Despite opening one cent below Tuesday’s settlement price, the benchmark carbon contract recovered quickly and hit a daily high at 5.41 euro already before Wednesday noon. The price received good support from a strong energy mix. Especially, the improving dark spread had a positive effect. As a consequence, the price finished the day with a gain of 10 cents (+1.9%). After trading close to the lower edge of the increasing trend channel for two days, the EUA Dec17 returned higher and the risk of breaking below the trend channel decreased again. Tuesday`s and Wednesday`s candles formed a bullish engulfing, generally a positive sign, although the low summer volume does not support the technical signal.
The EUA Dec17 opened with a two cents gap up on Thursday and explored levels not seen since 19 July by hitting 5.47 euro during the day. Although power prices climbed higher, the rally in coal prices deteriorated the German dark spread and weighed also on the price of allowances. As a consequence, the price gave back all its gains from the day, and closed at 5.37 euro, unchanged from Wednesday’s settlement.
The price had a relatively volatile day within a 12 cents range on Friday. The price started the day at Thursday`s settlement level and slipped briefly to a daily minimum at 5.34 euro to climb to 5.46 euro early in the afternoon. By the end of the day the price returned close to its opening levels and kept only 2 cents from its gains.
Thanks to the reduced auction supply and the higher power prices, the increasing trend channel is unhurt and is expected to keep the price also this week.
There will be a total of 8.9 million allowances auctioned this week, 17.1% less than last week. There will be only four auctions this week due to a public holiday in Germany on Tuesday (Assumption Day). 
The lower auction volume will continue to support the price of allowances this week again, but temperatures returning to or below the seasonal average will decrease the demand for power for air conditioning, potentially also reducing the demand for allowances. We therefore expect the price of allowances to move between 5.20 and 5.62 euro this week.

Source: Bloomberg, ICE

Monday, August 7, 2017

EUA Dec17: First week of reduced auction volume brought a gain of 3.3%

Although it opened the day flat compared to previous Friday’s settlement, the EUA Dec17 fell quickly to a daily minimum at 5.10 euro Monday morning. The shock didn’t last long and the contract recovered to trade comfortably between 5.19 and 5.23 euro before the auction. The strong auction result then lifted the price to a new daily maximum at 5.29 euro. The worsening of the dark spread capped the gains. The benchmark contract therefore finished the day at 5.23 euro (+1.0% d/d). Monday’s candle was another doji, indicating the uncertainty of market participants about which direction to take. On the other hand, the 30DMA climbed above the 200DMA, generally considered as a positive signal. The traded volume of 5.7 million in the most liquid contract reflected summer mood already.
The benchmark carbon market moved flat in the first hours of trading on Tuesday, but the surprisingly strong auction result lifted the price to a daily maximum of 5.38 euro. Traders realized shortly after the auction that the high clearing price might have been a mistake and does not reflect real demand for the allowances. So the price returned to 5.30 euro where it stagnated until the end of the day. The closing price represents a gain of 7 cents (+1.3%) to Monday’s settlement. The price closed at the upper edge of the 5.10-5.30 euro range it was trading last week. It also managed to close above the 20DMA.
The EUA Dec17 traded comfortable in a range between 5.25 and 5.30 euro most of Wednesday. In the afternoon however buyers lifted the price above the strong resistance level at 5.30 euro. The price was unstoppable until 5.43 euro, a level not seen for 2 weeks. The price remained close to its daily maximum and settled at 5.43 euro, a gain of 2.5%.
The front year contract opened with a two cents gap down on Thursday and fell quickly to a daily minimum at 5.37 euro. Although the settlement price of the auction was slightly below the secondary market price, the cover ratio was the second best for the week, so the price started climbing higher again in the afternoon. The daily maximum was 5.45 euro, a 2-week high. By the end of the day the price retreated a little, and closed the day at Wednesday’s settlement price, at 5.43 euro.
After opening at Thursday’s settlement price, the EUA Dec17 was able to hit a daily maximum at 5.46 euro, but after the weak auction, sellers pushed the market lower continuously. Price hit a daily minimum at 5.32 euro and stopped just above the 20DMA. The price was not able to recover, and closed the day (and the week) at 5.35 euro.

Beside the energy fundamentals, auction results will be the most important factors to influence the price of allowances. As market participants had enough time to price in the reduced auction supply, we expect the price to move between 5.00 and 5.60 euro.

Source: Thomson Reuters, ICE