Monday, September 25, 2017

EUA Dec17: Price heads back into trend channel

Lower power prices and the deteriorating profitability of coal fired power plants weighed on the price of carbon last week. The benchmark contract lost 4.3% in a weekly comparison.

As expected, the EUA Dec17 had a quiet start to the week. It opened with a 2 cents gap up and hit a daily maximum at 7.05 euro before falling to an intraday minimum of 6.71 euro. The daily range of 34 cents was significantly narrower than the 44-68 cents seen in the last week. The traded volume of 11.9 million allowances in the benchmark contract was also below the average of last week at 20 million. The price closed down 22 cents or down 3.2% from last Friday. 

On Tuesday, the benchmark carbon contract opened flat compared to Monday’s settlement and traded comfortably around 6.80 euro until the auction. 10-15 minutes after the auction, the price started rallying on news about ASN extending the inspections at EDF’s nuclear power plants. The front year German power and the EUA were jumping hand in hand. The EUA Dec17 reached a daily maximum at 7.20 euro. It retreated in the afternoon, but remained above the 7 euro level and closed the day with a gain of 29 cents (+4.3%). The traded volume of 34 million was the highest this year, although big chunk of it came from block trades and from rolling positions to Dec18 (13.8 million). 

The benchmark carbon contract opened with a 6 cents gap up on Wednesday, but declined continuously during the day on lower power prices and the deteriorating dark spread. The price reached a daily minimum at 6.79 euro, but managed to return back higher. The EUA Dec17 still finished the day in the red losing 12 cents or 1.7%. The MACD slipped below the signal curve, providing a bearish signal for the next days.

On Thursday, the EUA Dec17 repeated Wednesday’s pattern: it opened flat to previous day’s close and declined continuously during the day pressured by falling power prices and deteriorating dark spread. The price hit a daily minimum at 6.47 euro, a level not seen since 6 September. The price closed at 6.56 euro, the 20DMA exactly. The traded volume of 19.5 million allowances was the second highest this week. 

The EUA Dec17 consolidated comfortably around 6.60 euro in the first half of Friday, but in the afternoon, approximately after the time the British PM held her speech in Florence, buyers lifted the price to a daily maximum at 6.74 euro. By the end of the day, the price retreated somewhat, but still closed 9 cents (+1.4%) higher.

In the first half of this week, market will have to digest the German election results, especially the surprising success of right wing AfD. The euro weakened versus the USD immediately after the publication o the first results and if it is not able to consolidate again, it will deteriorate the German dark spread and have therefore a negative impact on the price of carbon.

On Monday, carbon market participants will also keep an eye on the meeting of the representatives of the Council and the European Parliament, as they will discuss the amended draft to extend the Stop the clock measure for airlines and the limitation of the eligibility of the UK allowances in the case of a hard Brexit. 

As the price of carbon showed a strong correlation with that of German power recently, the weather forecast about above average temperatures this week might also weigh on power and carbon prices. 

All in all, we expect the price of the EUA Dec17 to move between 6.00 and 7.00 euro this week, meaning that the price returns into the increasing trend channel that started mid-May.



Source: Thomson Reuters, ICE

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