Vertis – The ambition showed by the Council regarding the reform of the EU ETS pulled the benchmark carbon contract to a new 2-month high last week.

The EUA Dec17 opened 4 cents above the previous Friday’s settlement price, but declined continuously on Monday to close at 5.20 euro, just 1 cent above the support level represented by the 200DMA. Although the fact that the 200DMA kept the price from falling further, the two last candles formed a bearish engulfing which was a negative sign. Market participants were cautious ahead of the key meeting of the Council of the European Union on the next day and feared that member states would not be able to strike an agreement.

Depending on the headlines coming from the meeting of the European Council, the EUA Dec17 remained volatile on Tuesday. As the member states had agreed in the last hour of the trading session, the price finished the day with a gain of 0.8%. The hesitation of the market participants during the day was demonstrated by the doji candle the price left on Tuesday.

The agreement of the Council that leaves less flexibility between the free allocation and the auction share, proposes the cancellation of allowances after 2024  and the lack of auction supported the price on Wednesday. After Tuesday’s doji candle the EUA Dec17 moved upwards on Wednesday and gained 13% in a daily comparison. The price hit a daily maximum at 5.94 euro, a level not seen since the beginning of the year and managed to close just 3 cents below the daily high. The rally lifted the price above several resistance levels (which will work as supports in the future), but also above the upper Bollinger band. The 30DMA has been lifted above the 200DMA and the MACD climbed above the zero line that brightened the outlook for the next days.

On Thursday, despite hitting a new local high at 6.02 euro in the morning, the EUA Dec17 gave back almost all its gains from Wednesday. The price closed at 5.47 euro, a loss of 44 cents or 7.4%.

The price opened at the previous settlement level on Friday and after hitting an intra-day low at 5.42 euro, it recovered and closed the day at 5.60 euro, a weekly gain of 3.9%.

Despite the fact that the price was not able to hit a new local high on the last trading day, the technical picture is positive. The 20 and 30DMAs climbed above the 200DMA and the MACD reached the positive territory last week. The RSI is in neutral territory leaving some room for further appreciation. The only warning signal is that the price closed close to the upper Bollinger band at 5.68 euro.

We expect the price to consolidate at higher levels than it did in January and February. Our base range for the week is between the moving averages (5.20 euro) and last week’s high at 6.02 euro.

Expectations about ambitious reforms and some compliance interest will continue supporting the carbon market. The higher auction volume (5 auctions this week with a volume more than 4 million higher than last week) and the 2017 free allocation, however, might limit gains.

Source: Bloomberg, ICE