Higher power prices and the improving German dark spread lifted the benchmark carbon contract by 4.6% last week.
The EUA Dec17 started the week with a gap down at 5.79 euro, but it managed to recover quickly and climbed to a daily maximum at 5.91 euro. A weak auction result and lower German power prices weighed on the carbon market in the afternoon and the price hit a daily minimum at 5.73 euro. The contract was not able to recover from these levels and finished at 5.75 euro, a loss of 1.2% from previous Friday’s settlement. After the volumes above 10 million we saw last week, the traded volume only reached 5.4 million. Thanks to the correction, the price returned in the zone between the two Bollinger bands and the relative strength index slipped below 70.
On Tuesday, the benchmark carbon contract moved in a range of 15 cents. The price was relatively stable in the morning and more volatile in the afternoon when it fell to a daily minimum (and 4-day low) of 5.66 euro. Higher power prices and the improving dark spread however lifted the price by the end of the day. The price finished the day with a gain of 0.5%.
Despite opening with a gap down on Wednesday, the EUA Dec17 climbed continuously higher as it received support from higher power prices and an improving German dark spread. After Reuters reported that EDF found unknown deviations in its nuclear power plants, the price hit a daily maximum at 5.98 euro in the afternoon, a new 5-month high. The contract remained stable until the end of the day and closed at 5.95 euro (+2.5% d/d). The traded volume reached 32 million due to rolling of positions to March and December 2018. Thanks to the rally, the price reached the upper Bollinger band again and the relative strength index stepped above 70.
Although many market participants considered the price of the EUA Dec17 overbought already, the price started rallying Thursday morning already. After reaching the local maximum at 6.02 euro, many stop-loss orders were triggered and the price jumped to a new local maximum at 6.11 euro first. Then the price returned to 6 euro, but a new rally started in the afternoon and lifted the price to 6.12 euro. From there the price was not able to increase any further and it fell back to below 5 euro late in the afternoon. The benchmark carbon contract finished the day at 5.95 euro, unchanged from Wednesday’s settlement price.
The EUA Dec17 opened with a 2 cents gap up on Friday. The price fell to a daily minimum at 5.93 euro, but recovered quickly and climbed higher continuously during the day. The price hit a daily maximum at 6.10 euro in the afternoon and kept gains by the time the market closed. The settlement price of 6.09 euro was 2.4% higher than on Thursday. Last Friday was the first time since 2 January that the EUA Dec17 closed above 6 euro. The traded volume of 6.8 million however was the second lowest of the week.
This week might have a quiet start due to the Summer Bank Holiday due to which there won't be any auction on EEX on Monday.
There will be auctions from Tuesday to Friday however and the auction on Friday will offer more than 4 million allowances as the period of halved auction volumes ends. The German auction will be a test of the market, if it has enough appetite to absorb all the allowances.
Should power prices be able to increase further, their positive effect might counterbalance the increasing supply.
On the other hand, based on the relative strength index both carbon and the German front year power price are overbought already.
We therefore expect the price of the EUA Dec17 to remain in the increasing trend channel and probably to reach 6.30 euro, but the high auction volume and a possible correction in power prices might push the price below 6 euro again. On the other hand we do not expect the price to fall below 5.70 euro.
Source: Bloomberg, ICE