This week’s outlook remains bullish even as macro signals turn bearish with the new covid variant, though reluctance at high levels in the face of a potential outbreak of a vaccine resistant strain of covid may prompt some caution. The bull run seems to be largely speculator driven, specifically by options traders. Meanwhile, a cold snap, worsening through the week, affecting North Western Europe and the British Isles will keep the pressure on as heating demand drives EUA demand. No EUA auctions after 20 December will also keep the market very tight and risk to the upside amidst growing winter energy demand. The new covid variant presents uncertainty, but with coal power priced in ahead of gas power, and some knowledge about how to manage industrial production under a lockdown, the market appears confident in ignoring the virus – at least for now. Amidst all the bullish factors, EUAs are overbought on the daily and weekly charts. Buyers may lose interest at high EUA prices given the technical indicators that point to lower prices – as well as the covid risk. To return to a bearish outlook, however, we need EUA prices to close below €69.00 to break trend support. Below we discuss key levels and dates for EUA options, speculator involvement, the impact of covid, and key technical indicators and levels to watch for.
EU ETS Outlook: bullish, but market should trade with less confidence than last week
YTD Average Price: €51.02 Indicative EUA Price: €74.76
- New Covid variant causes jitters: wider markets on Friday dropped as news about a possibly vaccine resistant strain of coronavirus emerged. Early trading on Monday has seen a moderate recovery in both key wider markets and the EU ETS. Bad news could prompt a loss of confidence in the EU ETS. With cold weather and coal dominant in northern European power generation there should be significant buying interest to stabilise the market, while the situation is far less uncertain than in spring 2020.
- Prices rise in the afternoon – investor hedge against inflation? EUA prices continue to trade more heavily in the afternoon, suggestive of influence from American based traders who may be involving themselves in commodities as a hedge against inflation – or US based options traders.
- Options – key levels and dates: the Dec21 Options contract expires on 15 December. Proximity to the expiry will drive EUAs to trade at key levels, at least until then. There is a large amount of open interest for €80 strike call options and a bit less around €75. EUAs should trade around those levels and show volatility as we get closer to the Options expiry deadline.
- Winter weather and no wind: compounding the bull run is a blast of colder weather that has been described as worse for energy supplies than 2018’s Beat from the East. This week’s forecast is slightly milder than expected last week, but worsening towards the end of the week and potentially hanging around for a while. Low hydro levels, little wind and cold weather make for a recipe for fossil fuel powered electricity.
- European gas storage is being drawn on at a rate not seen since 2016: there is some potential for more coal to be turned on to conserve gas supplies. Low gas supplies look likely to be more bearish rather than bullish for EUAs as shutdowns are more likely to ensue rather than a wholesale increase to coal fired power generation – there isn’t enough interconnector availability to supply much of Europe with coal fired power.
- Technical analysis: the Relative Strength Indicator (RSI) still shows an overbought reading on the daily and weekly chart views. Having hit a new all time high this morning however, market participants may seek to buy dips in expectation of further price gains. To the downside, EUAs need to drop through €69.00 which represents trend support and then €67.01, which is the 38.2% Fibonacci retracement level. €75.78 is the next target, then €78.48
See also our UK ETS update here