February 8, 2015 by CaliforniaCarbon.info
CaliforniaCarbon.info, February 8, 2015: Through December and January, prices for California carbon allowances (CCAs) sustained a climb from the upper-$12.10s into the $12.80s for the front-end contract, even as observers continued to point to the overall length of the market. In spite of the rising floor and the entry of second compliance period (CP2) sectors serving to drive prices up, the expectation was that the first auction of the year, to be held a week on Wednesday, would provide negative discovery.
The front-end V2015 contracts witnessed drops in closing price on all five days of the past trading week, with sizeable decrements on Wednesday and Friday seeing the March 2015 delivery end 16 cents down on last Friday, at $12.68. Other contracts followed suit, with the V2016 Dec 15 similarly losing 16 cents to close at $12.79 for the week. Further out, the losses were even greater, with the Dec 2017 delivery on both the V2017 and V2018 declining nearly 30 cents, closing at $13.63 and $13.60 respectively, well under the expected price floor for 2018.
The downward price movement, on the back of expectations for a modest auction clearing, did also coincide with reports of industrial action in the refinery sector, which likely had some impact on market outlooks. Reports identify Tesoro Refining and Royal Dutch Shell as just two of the targets. The former decided to suspend operations at its Martinez facility, which anyway had been running at half-load as it undergoes maintenance.
The dropping prices seemed to produce an upturn in trading volume. Wednesday, the day of the first significant price loss, saw contracted volume of 6,150,000 on the InterContinental Exchange (ICE), or nearly five-sixths of the weekly total 7,515,000. The majority of this volume came from two 1.9 million blocks of V2017s delivering respectively this month and next. While the V2017 is no longer the offering on the advance auction, there are suggestions that this move may reflect an entity positioning itself to take on V2018s instead.
Over the week, contracts were struck for 1,660,000 V2015s, all of which will deliver between February and June. Entities expecting to pick up volume at the auction may be taking to the futures market to pre-arrange transactions for some of that volume, while the lowered price may have encouraged speculators to dip their toes into the market. With 73.6 million V2015s up for grabs at the auction, it is believed there is supply-side interest in front-end contracts. However, with purchase limits rising in proportion with the auction volume, but holding limits falling as a percentage of the annual cap, (and while the market remains long), conservative strategies in the pre-auction secondary market are likely from demand-side players. Further price decreases might be needed to produce high front-end secondary volumes in the next fortnight.
The past week also marked the first time that V2018 contracts traded on ICE. By Thursday, at the end of which the Mar 15 contract had lost 25 cents to fall to $12.43, just 33 cents above the floor, it had gathered traded volume of 250,000. Last year, around the time of the August auction, the front-end V17 contract traded below the auction price floor, as its late introduction on ICE compromised participants’ ability to unload spot volume. The usage of the V2018 contract at this juncture may firm up confidence as participants decide on advance auction bid strategies. With the entry of transportation fuels in both California and Quebec, it is expected that advance auction offering of 10.4 million will clear, if modestly.
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