March 9, 2015 by Rahul Rana
CaliforniaCarbon.info, March 9, 2015: A total of 9,806,000 California carbon allowances (CCAs) were contracted on the InterContinental Exchange (ICE) from 2 to 6 March, the week following the announcement of the results for Joint Auction 2, which cleared some 73.6 million V2015s into the market. Prices of 2015 deliveries for the earlier vintages remained stable, while V2017 and V2018 contracts witnessed significant price drops.
Much of the traded volume appears to be caused by traders rolling their positions on the V2015, V2016, and V2017 to the end of the year. Of the 5,411,000 V2015s contracted on ICE, 2,745,000 were for Mar15 delivery, 450,000 for May15 delivery, and 2,216,000 for Dec15 delivery. A broker speaking to CaliforniaCarbon.info stated “The volume traded for the front and the back-end seems more or less matched, and it looks like most of it were spread trades. Entities from all sectors are participating in the secondary market right now.” Furthermore, 1,400,000 V2016 (out of 1,650,000), and 2,000,000 V2017s (out of 2,100,000) appear to be symmetric calendar spread trades from March to December this year.
Prices for the V2015 Mar15 and Dec15 deliveries on ICE gained $0.02 each to close at $12.46 and $12.66, respectively. The implied funding rate between these two contracts is currently at 1.6%, which is lower than both the 6-month average of 2.46% and the 3-month average of 1.87%, which might be providing the incentive for traders to roll their positions onto December this year. Although the V2016 and V2017 contracts lost a few cents over the week, the calendar spread rate was also $0.20.
645,000 V2014s were contracted as well last week, all to be delivered this month. It is possible that one or more entities is looking to cover their compliance obligations due later this year. In November, entities will have to surrender allowances to meet their remaining obligations for 2013 (70%), and the entire obligation for 2014. Entities may use V2013 to meet their obligations for both years, but the V2014 cannot be used for 2013 emissions. There is, however, no premium in the secondary market for the V2013 over the V2014.
There have been no ICE trades for the V2018 since 10,431,000 of them were sold at the advance auction in February. The open interest remains at 250,000, from activity back in early February for delivery this month. While there may have been some movement over-the-counter (OTC), it appears as if a lack of bid-side interest is forcing front-end prices down. The V2018 Mar15 closed at $12.20, $0.12 lower than the previous week; the Dec15 delivery closed $0.13 lower at $12.40. It remains to be seen if prices will fall further to tempt speculative interests. Last year, the V2017 front end intermittently traded below the primary market price floor.
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