August 22, 2017 by Billy Hamshaw
Summary: California and Quebec’s twelfth joint auction has cleared for the second consecutive time at a record high settlement price of USD 14.75. An impressive bid-to-cover ratio of 1.79 on the Current Auction signals that sentiments are high on the WCI Carbon Market. For the first time since 2015, the Advanced Auction was also fully subscribed with a bid-to-cover ratio of 1.84, highlighting an elevated interest in future compliance obligations.
Secondary Market Impact
The total 63,887,833 million V2017 allowances on offer were purchased by market participants at last week’s Current Auction. Carbon allowances have been in healthy demand since February’s inauspicious auction results (link). Policy certainty brought about by a positive court ruling of CCC vs ARB as well as the passage of the extension bill, AB398, has further strengthened the demand for California Carbon Allowances (CCAs) (link).
With increased confidence over the market’s longevity, CCA prices observed on the secondary market soared since May’s auction which cleared at USD 13.80. A rise in trading activities coupled with a continuous decline in price over the past few weeks, suggested that the inflated prices observed over July had been over exaggerated. The looming auction spurred traders on the market to make a decision on pricing expectations over the coming year. On the day of the auction, the current front contract (Aug 17) was valued at USD 14.72, devaluing by only USD 0.01 prior to today’s results. The resounding clearing price of USD 14.75 on the Current Auction appears, therefore, to be well anticipated by analysts and traders alike, representing the largest ever price gap between the auction reserve price and annual floor.
Sitting at a premium of USD 1.18 to this year’s Auction Reserve Price and USD 0.23 to next year’s expected Reserve Price, today’s auction settlement price has set the benchmark for the secondary market for the remainder of this year’s compliance. Since the auction results, CCA prices have risen to USD 14.90 for the current front contract (Aug 17) and USD 15.00 on the Dec 17 delivery.
Over the past few weeks, increased trade on the Dec 17 deliveries has been observed with traders rolling their positions towards the year’s end. Given the fresh influx of volume, we can expect this trend to continue with increased trading activity on the Dec 17 benchmark contract and further Open Interest creation leading to increased funding rates going forward.
The Advanced Auction also showed strong results with all 9.7 million V2020 allowances on offer clearing at a bid-to-cover ratio of 1.84, the highest observed since November 2015. Given the more certain direction of cap-and-trade after the implementation of AB 398, the interest in future allowances reflects the eagerness of traders to start securing positions for future compliance obligations. The V2020’s on offer, settled at USD 14.55, USD 0.98 above this year’s Auction Reserve Price yet around USD 2.00 below 2020’s expected floor.
To meet the triennial compliance obligation of the second compliance period (2015-2017), CaliforniaCarbon.info estimates that covered entities in California and Quebec still require over 61 million CCAs from current or previous vintages. Should the last auction of this year be fully subscribed, over 50 million unused allowances will be carried over from Compliance Period 2 (2015-2017) to Compliance Period 3 (2018-2020).
Soon-to-be partners, Ontario, will hold their third auction on September 6, 2017. Trading activities have remained fairly inactive across the border over the past few months. Today’s pricing discovery on the WCI may, however, ignite trading activity on the Ontario market with participants looking to gain allowances prior to next month’s stand alone auction.
CC.info will be releasing a deeper statistical breakdown of trends and observations from the latest joint auction in our After-Auction Review. For more information about CaliforniaCarbon.info’s comprehensive Auction Data Suites, please contact firstname.lastname@example.org.
Billy Hamshaw (email@example.com)
Chandan Kumar (firstname.lastname@example.org)
Ronjoy Bezbarua (email@example.com)
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