Quiet pre-auction week for the secondary market

February 16, 2014 by CaliforniaCarbon.info

CaliforniaCarbon.info, February 16, 2014: Minimal price movement and drastically reduced traded volumes on the InterContinental Exchange (ICE) this week reflect the quietness of a market waiting for auction. Nevertheless, Friday’s movement for the immediate-delivery V2016, which alone accounted for more than half this week’s traded volume, may provide some insight into participants’ expectations for the auction.

With a few exceptions, prices inched downwards by nine to ten cents across the different California carbon allowance (CCA) variants. To make an example of the benchmarks, the V2014 delivering this December dropped $0.09, or 0.7%, from $12.29 to $12.20, while the V2016 delivering next December dropped $0.10, or 0.8%, from $12.50 to $12.40. Additionally, the V2013 delivering this December, which was the second-most traded instrument with 165,000, or 19.3% of the week’s volume, slipped $0.09, or 0.7%, from $12.3 to $12.21.

This was a fairly quiet week by volume. A total of 857,000 CCAs changed hands, a decrease of 52.3% from last week’s 1,797,000. The volume of traded V2013s dropped 76.1% from 787,000 to 188,000. The volume of traded V2014s dropped 85.4% from 610,000 to only 89,000. No V2015s have been contracted since November 2013, reflecting how these instruments have yet to be introduced through the primary market.

Yet the volume of traded V2016s increased, from 400,000 last week to 580,000 this. This is mainly due to a huge single movement of 455,000 February 2014 deliveries, which exchanged on Friday at $11.67. This might point to an entity picking up a forward vintage allowance at a price only $0.33 above the 2014 auction clearing. If so, it might reflect both a belief that forward prices might rise this year, and a disposition toward hedging against that risk. It is unclear why an entity would sell that quantity of allowances at a low price days before an auction.

This week’s price movements on ICE were partially reflected in the OTC market. Broker prices aggregated by CaliforniaCarbon.info show $0.05 drops in V2014 ($12.40 to $12.35) and V2016 ($12.60 to $12.55) prices Friday to Friday. However, the V2013 continued the previous week’s upward trend, moving from $12.00 to $12.10, reflecting directions from the spot market where prices have gone up from $11.87 to $11.90. In both cases demand is ultimately provided by parties looking to make up on compliance for a previous year, which might explain the separateness of its price direction.

Prices for both Golden CCOs and CCO3s traded through brokers held level during the week, with goldens operating at $10.00, a $1.03 premium over the CCO3s V2013 trading at $8.97.

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

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