Week 9: bullish sentiment remains and could see further tests of the 100 euro level, but failure to consolidate into a higher trading range could prompt a correction.
With an all time high hit last week and no new major fundamental drivers except cold weather affecting NW Europe to start the week (bullish price impact), the trend remains bullish and we could see EUA prices aim for €100 again this week. It does look like there is potential for a correction though as the price increase above €85 looks driven in significant part by investor activity. Failure to retake and hold above €100 could prompt a correction if some market participants start taking profits.
Chart 1: Dec23 EUA prices
Outlook: neutral-bullish
Key points:
Investor activity drives price increase: data from ICE shows that investment funds added approximately 27.4 million EUAs to their long positions between 20 January and 17 February - suggesting that investor confidence in the market was a significant driver for the price increase.
European Council ratifies REPowerEU in surprise vote last week, market ignores it to set all time high: REPowerEU wasn’t on the agenda but nonetheless got a vote and passed, just as EUAs were hitting a new all time high above €101. REPower was meant to pull EUA prices lower but was roundly ignored by the market.
Few bearish signals, but potential for a correction given the investor-led bull run? There are no clear bearish signals at present, but a variety of investor types likely bought into the market as EUA prices broke above €85 a few weeks ago. Investment funds, trading houses, utilities etc. could all be involved with different ideas on profit taking. If the market fails to take and hold €100, investors looking slightly shorter term could decide to take profit - which could prompt a sharp correction to around the €90 level - see technical levels below
Free allocation handout has begun: around 172 million EUAs have been distributed YTD. That could prompt some modest selling activity.
REPowerEU is so far being ignored, but will the start of extra auctions mean weaker EUA prices? Some analysts are commenting that the start of the extra auctions, potentially in April, should cause EUA prices to weaken. Raising 20 billion euros at 100 euros per EUA means selling 200 million EUAs over two years vs. approximate EUA supply in 2023 and 2024 of total 2.4 billion EUAs. The extra EUA sales come against a tight market balance and the expectation of further gains for EUAs later in the decade given that the supply is frontloaded from future dated auctions - so price losses won’t necessarily be that substantial.
Economic optimism driving buying activity? Eurostat figures show that industrial production is running strongly in spite of some negative economic data from Germany last week. The strength may be lending to the bullish price developments for EUAs. See chart 3 for their data on industrial productivity.
Energy fundamentals - cold weather, but weaker gas prices, renewables & nuclear provide a fairly bearish backdrop: cold weather at the start of the week affecting Northern Europe could keep EUAs supported. Beyond that, fuel switching from coal to gas may be back in a limited way - meaning some emissions reductions. Fuel switch costs have decreased substantially over the last three months - see chart 2. Resurgent French hydro and nuclear should also keep some fossil fuels out of the mix. Power demand is down - notably from heavy industry - all of these provide the background for a possible correction in the short term.
Utility hedging activity down for 2022, any adjustments to hedging due to fuel switch may have been unhedged in the first place: one key point raised in last week’s report however was that hedging activity by utilities was down last year as stressed markets made maintaining positions difficult - a return to more ‘normal’ hedging activity might just be a net addition to EUA buying activity vs. hedging nothing - but continued below average utility hedging activity might be another reason to anticipate a correction.
BASF Ludwigshafen to reduce production; energy crisis could reappear: the energy crisis is not over with the high gas price (2x the average price pre-Russian aggression towards Europe in 2021) taking a toll on heavy industry. With gas storage across Europe around 62% full, further cold weather could present problems heading into next winter. If the narrative is that EUAs are trading at high prices on economic optimism, this news could puncture that market view. The shutdown of the Ludwigshafen plant would remove a few million EUAs of annual demand.
German cancellation of EUAs to compensate coal phaseout back in the news: more news on cancelling EUAs to compensate a drop in demand as coal fired power plants are phased out could generate a spike in the EUA price.
Technicals: EUA prices reached €100 for the second time last Friday after falling to the week's low of €95.91. The movement, though, was short-lived as EUA prices ended the week at €97.39. In the meanwhile, the momentum decreased (but still positive), the RSI fell from its peak of 70, and it has stabilized near the €60 level. Since both the MACD and the exponential MACD are almost at a top-to-bottom cross, both indicators look set to soon turn bearish.
Looking at the Fibonacci retracement setup, the €95.56 level is the initial support of the 23.6%, which is where prices previously found support when the new yearly high was attained. If last Friday's rejection of €100 holds, prices should move lower towards the next Fibonacci support of 38.2%, which is at €92.03.
The trend line we identified last week continues to hold (see Chart 1). Beyond that, any break below €95.50 should take prices down towards the €92 level where stronger support awaits. The next significant support is at €89, which is also the 50% Fibonacci level and is where prices previously failed to break. Any sustained price increase over €100 will trigger a retest of the €101 level, and a break of the previous all-time high at €101.27 will trigger tests of the new levels of €103 and €105.
See technical indicators in chart 4 below.
R3: 103
R2: 101.95
R1: 101.27
CP: 98.40
S1: 95.50
S2: 93.41
S3: 92
• Indicative EUA Price: €98.70
• YTD EUA Price: €87.93
• Month to date average EUA Price: €94.27
Chart 2: ICIS - Fuel switch costs per tonne of CO2 (EUA must reach this price to allow switch from coal to gas & consequent emissions reductions)
Chart 3: Eurostat figures on industrial production vs. October 2020 levels
Chart 4: technical indicators