Monday, October 2, 2017

EUA Dec17: 20% less allowances to be auctioned this week

Helped by the improving German dark spread and optimism about the reform of the system, the EUA Dec17 gained more than 6% last week. 

The EUA Dec17 started the previous week with a spectacular rally and jumped by more than 10% during Monday's trading session hitting a new local maximum at 7.36 euro. The price broke above the previous resistance at 7.20 euro that halted appreciation many times in the past, but the contract was not able to reach the September high at 7.72 euro. The traded volume of 37.9 million allowances was a new record. 15.1 million has been traded / rolled over to Dec18. The price kept most of its gains until the market closed and it finished 63 cents or 9.5% higher. 

After opening with a two cents gap up on Tuesday, the EUA Dec17 turned lower and hit a new daily minimum at 6.88 euro. But exactly when traders expected the benchmark carbon contract to give back all the gains of Monday, the price turned higher again. By the end of the day, the EUA Dec17 climbed back shortly above 7 euro, but settled with a loss of 30 cents or 4.1% at 6.98 euro. 

The EUA Dec17 had a weak start to the day on Wednesday and slipped to the 20 day moving average. Although the price climbed higher in the second half of the day, it still closed with a loss of 5 cents (-0.7%). 

On Thursday, the EUA Dec17 opened flat and slipped to a daily minimum of 6.78 euro in the morning hours. The strong auction (clearing price in line with the secondary market) lifted the price back towards 6.90 euro. Early in the afternoon, the price of carbon started rallying hand in hand with Western power prices on the announcement of the French nuclear safety authority to shut down 4 generation units at the Tricastin nuclear power plant. The price hit a daily maximum at 7.33 euro, just 3 cents below Tuesday’s maximum. By the end of the day however the effect of the announcement vanished in both power and carbon markets. The EUA Dec17 finished the day at 6.96 euro, just 3 cents above Wednesday’s settlement. Thursday’s candle was a doji showing hesitation of the market participants about which direction to take.

On Friday, the price opened with a 10 cents gap down, but increased continuously during the day. The rally accelerated after the auction cleared at a premium to the secondary market. After reaching a daily maximum at 7.29 euro, the price turned lower. It closed the day with a gain of 1.6%.

This week, the volume of auctioned allowances will decrease by more than 20% as there won't be any auction on Tuesday due to a public holiday in Germany (Reunification Day). The lower supply could support the price and keep it above the 7 euro level. 

Technical discussions about the reform of the EU ETS continue on Thursday. Any leaked information about support for more ambition could also have a positive effect on the carbon market.

Energy mix could be still the most important factor impacting the price of allowances. The seasonality chart of the EUA price shows that prices tend to increase in October with the official start of the heating season. In addition, carbon (and power) market has the inspection of the French nuclear safety authority ASN as Damocles' sword above their heads.

From a technical perspective, the benchmark carbon contract established an increasing trend channel since mid-May from which it broke beginning of September as the price increase accelerated. In the last two weeks the price moved in a triangle near the 7 euro level. From the downside, the 20DMA (at 6.85 euro) provides a good support, followed by the 30DMA and local minimums close to 6.50 euro. To the upside, local highs near 7.40 euro represent the first strong resistance. We expect the price to move within the above range before the next trilogue meeting.



Source: Bloomberg, ICE



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