Vertis – The EUA Dec17 gained more than 1 euro in one week and hit an almost 2 year high on Friday. The benchmark carbon contract closed the week with a gain of more than 20%.

The EUA Dec17 started the week at the level it finished last week. Previous Friday’s minimum at 5.82 euro proved a good support, because after hitting it in the morning, the price climbed higher continuously during the day to hit a daily maximum at 5.95 euro. The carbon market received support from higher power prices and improving profitability of coal fired power plants. The news about Germany and France pushing for a quick consensus about the reform of the ETS had a positive effect as well. The closing price of 5.92 euro represented a gain of 1.5% from last Friday.

The EUA Dec17 gained almost 10% on Tuesday, rallying from a daily minimum of 5.91 euro to a new 8-month high at 6.53 euro. The jump came as a surprise for most of the market participants who expected the price to drop considering previous week’s correction and the increasing auction volumes. Those who saw the price falling last week of August, either sold their allowances or they even went short. When the price started increasing, all these market participants were caught by surprise. Those who sold below 6 euro, bought back the allowances to sell them at a higher price. And those who opened short positions, saw their stop loss orders triggered. The traded volume in the Dec17 contract reached 18.9 million versus the 7 million on Monday and the August daily average volume of 9.7 million.

The EUA Dec17 was unstoppable on Wednesday again and expanded its gains by more than 3%. The price hit a daily maximum at 6.93 euro, a level not seen since April 2016. Market participants got more optimistic about the success of negotiations and lifted the price to new local highs.

On Thursday, the benchmark carbon contract started with a consolidation after the rally of the previous days. It opened 4 cents above Wednesday’s settlement price and even slipped to a daily minimum of 6.64 euro when the auction was cancelled on EEX. In the afternoon, however, bulls invaded the trading floor again and lifted the price to a daily maximum of 7.02 euro.

The EUA Dec17 gained an additional 2.5% on Friday and was able to close above the 7 euro level since January 2016.

Last week’s rally lifted the RSI of the EUA Dec17 into overbought territory (again), but market participants do not seem to care.

The question is what is really behind the price jump, the restart of political negotiations or the strong energy mix (the price of front year German power hit a 3.5-year high on Friday).

If traders take profit after the trilogue negotiations this Wednesday, it becomes clear that speculation on political discussions lifted the price. Representatives of the EU member states meet MEPs Wednesday late afternoon to discuss the reform of the EU ETS. Based on the information market received about behind closed doors discussions last week positions came closer, but they are still distant on the triangle of issues (ambition, auction share and funds). Signs of a smooth agreement on an ambitious reform package could lift the EUA price, but further delays and / or no signs of ambition could hurt the price.

If, however, the price advances further this week, there is a good chance that the appreciation is fundamentally driven. From the technical analysis’ point of view there is no strong resistance until 8.49 euro (a local high from December 2015) from where the price started plummeting in January 2016.

The increased auction volume will make the job of bulls a little bit more difficult. Due to the cancelled auction last Thursday the daily volume of the EU auctions on EEX (Monday, Tuesday and Thursday) increases by 1 million units.

Source: Bloomberg and ICE