EUA Dec17: Political uncertainty keeps price from reacting on strong energy fundamentals

2017-10-30 09:42
Despite the strong energy mix the EUA Dec17 lost 5.3% last week on continuing political uncertainty and profit taking.

As the euphoria about the Brexit amendment vanished, the EUA Dec17 continued its downward movement and fell for the third day in a row, losing 1.7% last Monday. The price had a relatively strong start to the day at 7.60 euro, but after hitting shortly a daily maximum at 7.62 euro, the price declined continuously on a weak energy mix. The traded volume of 8.6 million remained well below the previous week’s daily average of 14.1 million. 

Although in the morning hours it still seemed that the EUA Dec17 would continue its downward path for the fourth consecutive day, the price turned higher before Tuesday noon in tandem with German power prices that climbed back above 36 EUR / MWh. The price hit a daily maximum at 7.63 euro in the afternoon and managed to keep gains by the end of the day to finish 0.4% higher at 7.47 euro. Tuesday’s doji candle indicated that the market was looking for direction. The MACD, on the other hand, slipped below the signal curve, providing a  negative signal.

On Wednesday, the price moved in a range of 23 cents. News about the draft to amend the Registry Regulation and to reduce the eligibility of UK allowances for compliance in the EU ETS lifted the price in the opening and in the first minutes of trading to a daily maximum of 7.59 euro (the high of Tuesday at 7.63 euro could not be reached). The weak auction results however pushed the price continuously lower during the day to a minimum at 7.36 euro, a one-week low. The price remained close to the lower edge of the daily range and closed at 7.40 euro, a loss of 0.9%. The traded volume of 17.7 million was the highest since in a week. 

After a calm start, the carbon market turned sharply lower Thursday afternoon. The EUA Dec17 opened with a 4 cents gap up and even increased to a daily maximum at 7.49 euro, but sellers closed the gap soon and the price declined continuously in the second half of the day to hit a new 2-week low at 7.16 euro, the 30DMA. The price was not able to recover and closed the day at 7.20 euro, a loss of 2.7% in a daily comparison. 

The EUA Dec17 had a volatile day on Friday. After opening in line with Thursday’s settlement at 7.20 euro, the price increased to a daily maximum at 7.32 euro before noon. Early afternoon the price fell to a daily minimum at 7.13 euro, but then it climbed back to 7.27 euro just to fall again and close the day at 7.17 euro. By the end of the day the price lost 0.4%. The settlement price was just one cent above the 30DMA that proved a good support until now and is being retested these days. The traded volume of 24 million was the highest since 28 September.

In our base scenario, we expect a quiet week as Wednesday will be a public holiday in many European countries and market participants might stay away from the market. 

The UK auction, however, won't be affected and there will be therefore five auctions this week offering 21.5 million allowances, 2.7% less than last week. Weak auction results might push the price of allowances further down.

The energy mix however might offer further support to the carbon market. German front year power increased above 36 EUR / MWh last week, Brent jumped above 60 USD per barrel and the German dark spread improved. The carbon price, however lagged behind the other elements of the energy mix. 

Political deadlock causes the biggest uncertainty for carbon traders. Before the next trilogue about the reform of the EU ETS, it seems that the European Parliament and the Council both stick to their preferences about the emissions performance standard and the support of coal fired power plants. 

Lack of clarity about the UK's relationship with the EU and its ETS membership and the situation in Spain are not helping either to increase investors' appetite for riskier assets. 

Despite the strong energy mix we therefore remain neutral for this week and expect the price of allowances to move between 6.80 and 7.80 euro.


Source: Bloomberg, ICE
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