January 11, 2015 by Rahul Rana
CaliforniaCarbon.info, January 12, 2015: The market entry of the transportation fuels and natural gas supply sectors appeared to lead an upsurge in both California carbon allowance (CCA) price and contracted volume in the past week. The V2015 benchmark InterContinental Exchange (ICE) contract peaked for the week at $13.14 on Wednesday, while of a staggering 22,885,000 contracted volume, 15,525,000 moved on Wednesday and Thursday alone.
The two sectors, whose emissions as reported for 2013 amounted to 204,191,277MtCO2e (more than the rest of the sectors put together), do not receive any industrial assistance in the form of freely-allocated CCAs from the state, and must procure what they need for compliance from the primary and secondary markets. At the last auction in November 2014, three of the four largest emitters in the fuels sector (which is worth 156,763,667MtCO2e) did not qualify to bid, while qualified bidders covered 96% of emissions from the natural gas sector.
A number of traders refer to a likely position-taking upon market entry, which sees these entities contracting at once for envisioned future needs. The V2016 contract was the most heavily-traded, picking up nearly half all ICE volume at 11,310,000.
This level of interest seemed to underpin an upward trend which the market has witnessed over the last couple of months. The spot delivery, priced at $12.20 at November’s end and $12.63 at December’s end, rose to close Friday at $12.88, a level not touched since the negative discovery at Auction 4 in August 2013.
Yet, many in the market believe that the fundamentals have not changed, and that the market will quickly come off the boil preceding a ‘full reset’ after Joint Auction 2 next month. The benchmark V2015 contract saw successive daily price falls for the first time since Dec 9 and 10, and only the second time since last August. On this occasion, the contract shed 19 cents from Wednesday to close 5 cents under, week-on-week, at $12.95. With the exception of the front-end deliveries, most contracts also closed this week at a lower price to last. It remains to be seen which direction the market will take in the coming week.
The discordance between front-end deliveries and all deliveries thereafter has produced greatly narrowed spreads within 2015. The V2015 Jan 15 trades closer than ever to the V2015 Dec 15 at 15 cents under, versus 38 cents at Christmas and 50 cents at the beginning of November.
This may underlie interest in shortening positions within Q1, backed up by the availability of prompt and advance vintages at next month’s auction. The current auction offering for 2015 more than trebles from 2014. 5,585,000 CCAs were traded through the week for delivery in Q1, 3,970,000 of which cashed in on the Wednesday and Thursday peak prices. On the days in question, the March deliveries fetched $12.94 and $12.92 for the V2015, and $12.80 and $12.78 for the V2017. This year’s auction reserve price is set at $12.10.
Another contributor to this week’s volume were the 7.5 million V2016s exchanged on Wednesday, split equally between the Dec 15 and Dec 17 deliveries. Brokers believe it to be a carry trade.
Any rollback in demand in the coming days is expected to begin by widening the bid-ask spreads cited by the major brokerages. The liquidity witnessed this year has completely outstripped levels of activity from the same period in 2014, when in spite of weather-led bullishness only 15,717,000 CCAs were contracted via ICE across the entire month of January.
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