Last week’s price drop came to an end at support around the €92 level. Another spell of coldweather mid-week could help to limit losses, while subdued French nuclear output should alsoadd some demand for EUAs. The March options expiry could also keep EUAs close to keystrike prices. Fundamentals don’t necessarily look like the key driver at the moment though,given that the price increase seems to have been mostly speculator motivated with a lot of hypeabout reaching €150 per EUA. We might see some continued buying interest on that basis,though with additional EUA supply ready to come to market as part of REPowerEU, the marketcould also wait for more news on auction dates and volumes to be sold in 2023.
This gives us a neutral outlook. Technical indicators might be instructive as to next moves. Abreak under €91.54 or above support around €95.50 could help to set the direction for themarket, the rejection of €95.50 on Monday and a triple top pattern on the weekly chart could send a bearish signal.
Outlook: neutral
Key points:
REPowerEU uncertainty could keep market neutral: the market may wait for news on theadditional REPowerEU auctions - analysts had expected these to begin in April, though thereare rumours about the auctions starting at the end of summer. Investors seem to have beenhappy enough to ignore bearish news, including the ratification of REPowerEU by the EuropeanCouncil however…
Is there a narrative of EUAs to €150? Buying interest might be partially driven by investorslooking to the idea that EUAs will hit €150, which came out when we were trading above €100 afew days ago.
Investor activity drives price increase: data from ICE shows that investment funds addedapproximately 27.4 million EUAs to their long positions between 20 January and 17 February,and a further 4 million until the 24th - suggesting that investor confidence in the market was asignificant driver for the price increase. The ICE commitment of traders data on Wednesdaymay give some clues as to how strong investor buying interest still is with EUAs above €90.Bullish
EDF strikes reduce French nuclear output by 2.1GW or two reactors: imports fromneighbouring countries are replacing the missing generation, these imports are most likelylargely fossil fuelled. Bullish
Colder weather forecast to add to EUA demand until mid-week, milder weather for weekend: towards the end of the week North Sea wind levels look set to increase, which couldhelp to cool buying interest. Bullish
March options expiry: options expire on 22 March. Key levels to look out for to which EUAsmay be attracted are:
Free allocation handout has begun: around 172 million EUAs have been distributed YTD (vs.estimated 2022 industrial emissions of 669 million tonnes CO2). Even if we don’t see sellingactivity as a result of the free EUA distribution, we might see some companies use their freeEUAs to cover their buying requirements as long as EUAs are above €90. Bearish
Return to fuel switch theoretically possible, but little market reaction: fuel switch from coalto gas seems to be back, at least in a limited way as front month TTF Gas trades well under 50euros per MWh. This should prompt EUA selling from utilities as they rebalance their EUAhedges to reflect the lower emissions profile of natural gas. It is possible that given 2022’sexceptionally stressed markets no EUA hedges had been put in place, meaning no net selling ofEUAs. Data on energy generation in any case doesn’t support a return to fuel switching fromcoal to gas - only renewables seem to be able to significantly displace coal fired power lately.
Technical analysis: If speculators are the key price drivers at the moment, technical indicatorsmay be instructive as to where EUAs go next. After setting a new all-time high at €101.25 and afew attempts at going even higher last week, the market ultimately rejected the €100 level,sending EUAs 9.2% down to a low of €91.50. A recovery on Friday to just above technicalsupport at €92.15.
The new all time high on Tuesday puts the market close to forming a triple top on the weeklychart, which is a signal of a reversal in trend – or an evening star on the daily chart, which isalso suggestive of a trend reversal.
A break below the trendline (see chart 1) should change the mood for the bearish, and a breachof €89.00 should represent a more solidly bearish signal. €95.50 represents key resistance tothe upside. Until €92 is broken, further gains back towards the all time high cannot be ruled out.
R3: 101.95
R2: 97.55
R1: 95.50
CP: 93.60
S1: 91.54
S2: 89.00
S3: 87.50