A closing price above €5.05 would reinforce the bullish signals seen in last week's 8.5% rise in EUA prices, says Louis Redshaw.
Market Development
- EU Allowance (EUA) prices ended the week 8.5% higher at €4.98
- Friday's close – the high of the week – followed a substantial rise on Friday afternoon
- Clean-dark spreads hit record lows as carbon and coal price rises outstripped those of power
- EEX renewed its auction contract, but the start date means 10Mt less will be auctioned in August/September
Auction Overview
- The Polish auction on Wednesday will increases this week's supply to 18.178Mt, up from 17.260Mt last week
- Next week is the last week with a full auction schedule before the August slowdown
- Friday's EEX announcement reduces the late August and early September auction schedule by 10.275Mt
EUA Price Action
EUAs posted a surprise 8.5% weekly rise to close at €4.98 on Friday, the high of the week. This followed initial falls on Monday and Tuesday morning. Friday's close at the weekly high sets a bullish tone going into this week as the August auction slowdown looms.
We had anticipated a neutral week as the positive and negative forces roughly balanced. In terms of clean-dark spreads, however, the week was more bearish than expected. The power price was unable to keep up with coal and carbon price rises, leading to clean-dark spreads hitting record lows. This reduces the incentive for utilities to come to market to hedge carbon, but still the market closed up on the week.
On Friday morning the market dropped to levels that would have validated the neutral stance but, from around lunchtime, prices rose rapidly. Initially, this bullish momentum – that contradicted the expected impact of low clean-dark spreads – was put down to there being only two weeks of full auctions before the auction slowdown in August.
However, an EEX press release after the market's close (see below) perhaps explains the price rise, particularly if some market participants had access to this information early. Elsewhere, the failure of the bears to set a new low last week (€4.36 vs. €4.28 on 1 July) will also have seen some of the shorts buying back EUAs and, with oil and wider energy prices surging higher, carbon prices set up a 'double bottom'. This bullish technical formation, comprising a drop, a recovery, a second drop and another recovery, indicates that buyers are supporting the market. A double bottom would be confirmed for technical traders, by a close above €5.05 (the high of the rally between the dips).
Price Impact
It would appear that we found the bottom of the market at €4.28 following the Brexit referendum. Reduced auctions for August seem to have overpowered bearish signals and the heady mix of bearish and bullish signals make volatility around the technical levels the only certainty.
The consequences and options of the referendum vote were examined in our Brexit webinar last Tuesday. If you would like the recording and slide pack, please contact us.
| Weekly Price Changes (EUR) | ||||
|---|---|---|---|---|
| Product | 08/07/2016 | 15/07/2016 | Change | % Change |
| EUA Dec 16 | 4.59 | 4.98 | 0.39 | 8.50% |
| DE Power Cal 17 | 27.00 | 28.15 | 1.15 | 4.26% |
| API2 Cal 17 | 51.94 | 54.80 | 2.86 | 5.51% |
EEX reduces August and early September auction volumes
Leipzig-based EEX has won the right to host the auctions for all member states except Germany, the UK and Poland for another five years. However, the start date for the new contract does not match up with the end date of the old one, meaning that the auctions in between will be cancelled.
This will lead to 10.275Mt less auction supply at the end of August and beginning of September. The total annual auction volume will be unaffected, however, as the cancelled volumes will be added to auctions later in 2016. In the short term, it provides some unforeseen bullish pressure, particularly as it coincides with the auction slowdown in August when volumes are roughly half their usual amount.
The week ahead
The rise in EUA prices, despite heavy falls in the clean-dark spreads, would suggest either large speculator positioning or utilities' hands being forced with an auction slowdown looming. Both these scenarios would indicate further bullish moves are to come.
However, the mixed message from the low clean-dark spreads means that, to maintain momentum, the bulls need to overcome the next hurdle, a close above the psychological level of €5 and the previous high at €5.05. Above €5.05, a return to the price levels prevailing before the Brexit referendum would be the next target. That would see prices return to €5.50 and, potentially, €6.00.
Louis Redshaw is a founder of Redshaw Advisors
