January 18, 2015 by Rahul Rana
CaliforniaCarbon.info, January 18, 2015: The market for California carbon allowances (CCAs) appears to have settled, with a Friday-to-Friday decrease on most front-end InterContinental Exchange (ICE) contracts backing up the intra-week price fall seen Thursday before last. January 2015 contracts saw pronounced weekly drops for the V2013/4 (10 cents, to $12.76) and the V2016 and V2017 (7 cents, to $12.67 and $12.62 respectively), as well as a fractionally gentler fall for the V2015 (4 cents, to $12.75). Similar observations were made for deliveries through Q1.
These developments appear to have corrected spread movements in preceding weeks. With the end-of-year deliveries holding steady on most vintage offerings, the V2015 prompt-benchmark spread, which had lowered to a record 15 cents where it likely encountered some technical support, is now back at 21 cents, having traded close to the 30-cent mark at Christmas. The V2013 and V2014 coming down harder than the V2015 has realigned at a year-round single-cent differential thought more reflective of the lack of CP1 compliance shortage.
In previous weeks, aggressive buying by new CP2 entrants, given their late entry and zero-allocation status, was thought to have created upward price pressure, particularly on front-end contracts. “Fuel suppliers could be purchasing allowances based on current production which would then allow them to price the cost of compliance directly in their product”, said a market insider who wished to maintain anonymity.
Having cleared some 22.9 million allowances (nearly 16 million of which for delivery in 2015) in the first week of January, the ICE market unequivocally pulled back this week at 2.49 million exchanged volume, all of which will deliver in 2015. Demand-side reduction may explain the particular intra-week price dynamics; with 760,000 and 1,705,000 CCAs clearing on Tuesday and Wednesday respectively as prices continued to edge down from last week’s close, a drop-off in buyer interest saw traded volume fall to 25,000 for the rest of the week, and coincide with a five-cent block being shaved off most contracts on Thursday.
It is not entirely clear why this pullback occurred. Transport fuels reported emissions of 156.8 million for 2013, but may use four CCA auctions held this year in addition to participating in the secondary market. “It’s unclear what could have moved the market”, stated one trader.
It remains to be seen if falling prices tempt some buyers to re-enter the market with the next auction just a month away. Otherwise, prices can be expected to settle around $12.70 for the spot delivery and up to 10 cents lower for front-end ICE contracts, maintaining a reasonable gap to the 2015 price floor of $12.10. If suspicions are founded that some traders have shortened positions to take advantage of bullish prices earlier this month, there may be further support for both spot and front-end as we approach the next auction, which will offer 73.6 million V2015 allowances to both California and Quebec participants.
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