Minimal immediate price reaction to May cap-and-trade auction in California

May 25, 2014 by CaliforniaCarbon.info

CaliforniaCarbon.info, May 25, 2014: Prices in the secondary market for California carbon allowances (CCAs) did not show any large reaction to the announcement of the results from the seventh cap-and-trade auction on Wednesday. For the near-term vintages, a price fall of a few cents seemed to occur in between the conduct of the auction and the publication of results, while the vintages that are slightly further out lost about five to seven cents from Wednesday to Thursday.

For example, the current benchmark (V2014 Dec 14) contract on the InterContinental Exchange (ICE) fell from $11.73 to $11.66 from last Friday to this Tuesday, before ending this trading week at $11.67. Broker bid-ask spread medians averaged by CaliforniaCarbon.info show clearing for the same contract dropping from $11.78 last Friday to $11.71 on Tuesday, with this week closing at $11.70. The auction for V2014 allowances cleared at $11.50. Near-term deliveries followed a similar trajectory, with a fall from $11.58 last Friday to $11.53 on Wednesday preceding the week’s close at $11.52. This is a slight discount to the broker-traded spot delivery, which has moved within a four-cent band all week, closing Friday at a median $11.56.

Contracts for CCAs with vintage years 2015 or after witnessed the slight decrease occur in the second half of this week. The V2015 delivering in December 2014 lost seven cents on Thursday, dropping from $11.70 to $11.63, where it closed the week. There is still a small premium of 3 to 4 cents placed on the V2014 for delivery before the 2015 surrender obligation date, indicating a slight market expectation of tightening led by compliance needs. Further out, the falls were even smaller in magnitude. The forward benchmark (V2016 Dec 15) dipped from $12.15 at the start of the week to $12.13 on Tuesday, before closing the week at $12.11.

This may generally reflect the market coming to terms with the sense that it has lengthened somewhat in the last few weeks. Only 44 percent of the V2017 CCAs offered at auction were bought, at the floor price of $11.34. This lack of mid-term confidence has seen the secondary forward market trade well below the expected floor prices in future vintage years. The 2016 floor price at a baseline 1.5% rate of inflation would be $12.86, $0.75 above the V2016 Dec 15 contract. This difference grows for vintage-delivery combinations that are even further out.

What is interesting this week is that the V2017 May 14 ICE contract price has touched the primary market floor price for 2014. This suggests that buyers are unwilling to pay above the auction clearing price for any allowances, which makes sense since the auction did not clear, reflecting excess supply conditions. That buyers are also willing to sell at this price may reflect that forward delivery prices for future years remain low (relative to the likely future price floors), which makes forward-contracting now a somewhat attractive option.

For further information regarding this article, please write to contact@californiacarbon.info.

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