March 10, 2014 by CaliforniaCarbon.info
CaliforniaCarbon.info, March 10, 2014: There is more than a hint that the secondary market for California carbon instruments suffered a little for the distractions of the ongoing Quebec and Regional Greenhouse Gas Initiative (RGGI) last week. Traded volumes on the InterContinental Exchange (ICE) plummeted to a mere 614,000, or 17.3% of the 3,515,000 traded in the previous week; meanwhile, broker price spreads suggested minimal price and bidding activity throughout the week.
Prices for most instruments and delivery dates registered small, slight downward adjustments during the week. The V2013 delivering in December 2014 slipped by five cents, closing at $11.95, 0.4% down on last Friday’s $12.00. The current-vintage benchmark also traded within a five-cent range, closing at $11.95, 0.3% down on last Friday’s $11.98. The V2015 delivering in December 2015 shed nine cents during the week, closing at $12.21, 0.7% down on last Friday’s $12.30. The forward benchmark, the V2016 delivering in December 2015, lost seven cents to close at $12.20, 0.6% down on last Friday’s $12.27.
It was contract volumes, however, that demonstrated a lack of activity throughout the week. Both the V2013 and V2014 saw less than 10% of the previous week’s contracted volumes. 118,000 V2013s were contracted last week, down 91.9% on the previous week’s 1,457,000. 81,000 V2014s were contracted last week, down 91.1% on the previous week’s 913,000. 415,000 V2016s were contracted last week, down 64.7% on the previous week’s 1,175,000. No V2015s were traded last week. The total volume was 614,000, or a mere 17.3% of the 3,515,000 traded in the previous week.
The distribution of this traded volume also makes interesting analysis. Of the 199,000 V2013 and V2014 instruments that were contracted, all but 5,000 (Dec 14) were for March 2014 deliveries. This suggests that the InterContinental Exchange was being used as a spot market, with firms either selling their auction procurements onto providers willing to ‘carry’ the instrument for a few years, or taking advantage of a price lull to purchase V2013 instruments with a view to the surrender obligations in just over half a year. Likewise, 290,000 of the V2016s are to exchange this month, suggesting again compliance entities selling their holdings to other players happy to sit on the instruments. In total, 484,000 of the 614,000 (78.8%) instruments exchanged on ICE last week were for March 2014 deliveries.
Reduced broker activity
Spot delivery prices aggregated from broker price marks showed no change throughout the week. The average bid-ask mid-pointed price of $11.66 last Friday rose to $11.69 on Monday, and levelled off thereafter, which suggests minimal activity going through the brokers. This raises the intriguing prospect of market players conducting their spot trades directly on ICE.
This might reflect the fact that attention was turned to the RGGI and especially the Quebec auction, on the part of brokers, speculators, as well as compliance entities. It remains to be seen how the secondary market in California responds to the results of those two auctions. While demand in Quebec was much stronger – possibly a partial result of Californian entities participating directly for the first time – than last time around, bids only fulfilled 98.7% of the available volume on the current vintage, and the auction cleared at the floor of CAD11.39 (USD10.26) – over a dollar under the Californian floor of USD11.34. On the other hand, on the back of a 45 percent cap reduction not including the additional adjustment of auction budgets to account for latent private banks, bid ratios in RGGI surged to over 300%. The entire reserve budget for 2014 (5 million allowances, triggered at $4.00) cleared, and just under 23.5 million allowances auctioned for $4.00.
No movements were recorded in offset prices last week, reflecting the minimal change in allowance prices. It is expected that the first desk reviews of second verification will be conducted sometime in the coming weeks, which would add a new dimension to the over-the-counter market.
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