Secondary market prices gain as auction is cancelled

November 24, 2014 by Rahul Rana

CaliforniaCarbon.info, November 24, 2014: 3,941,000 California carbon allowances (CCAs) were traded on the InterContinental Exchange (ICE) the past week, with prices rising after the joint auction slated for 19 November was cancelled due to technical issues which prevented some participants from logging into the auction platform.

The 1,947,000 V2014s accounted for the largest share of the volume exchanged. 1,222,000 V2014s will be delivered in December (770,000 arranged from Wednesday onwards), and 75,000 in January, 550,000 in March, and 100,000 in October next year. The prices for the V2014 Dec 14 (along with the V2013 and V2015 Dec 14 contracts, which are priced similarly) and V2017 Dec 14 shot up on 19 November, as traders looked to the secondary market to cover positions shorted by the non-occurrence of the auction. The V2014 Dec 14 ultimately gained $0.10 over the week to close at $12.26.

1,169,000 V2017s were also traded (944,000 Dec 14, 200,000 Mar 15, and 25 Apr 15). The bulk of the V2017 Dec 14 (619,000) was in fact contracted on Tuesday before the scheduled auction – 325,000 was the subsequent contracted volume for the contract, with the open interest also rising by a similar margin up to Thursday. The remainder of the week’s ICE volume came from the V2013 Dec 14 (50,000) and V2015 Mar 15 (775,000) contracts.

The V2017 Dec 14 gained $0.05 on 19 November itself, and finally closed $0.12 higher week-on-week at $12.09. Brokers have stated that despite the cancelled auction, activity in the secondary market had not increased significantly. With the new date for the auction scheduled for 25 November (rather than, as had initially been feared, sometime after Thanksgiving) and CCAs to be delivered to winning bidders on 23 December, traders falling short on their December obligations can still buy on the primary market.

The first joint auction will offer 23,070,987 allowances of the current-year vintage and 10,787,000 allowances for the 2017 vintage year, with both auctions having a floor price equivalent to USD 11.34. Traders speaking to CaliforniaCarbon.info expect this current auction to clear with a bid-ratio at least as high as the previous one (1.14), and the clearing price to be well above the floor. This is the final auction before the floor price increases by 5% in real terms, while the market size increases drastically as the unassisted transport fuels sector is introduced to the program. With the current vintage trading at well over $12 since mid-September, the auction would offer buyers the opportunity to attempt stocking up on cheap CCAs if it clears below $12. A trader indicated that they expect the bid ratio for the current auction to be nearer to the 1.5 mark and the clearing price to remain below $12, as the transport fuels sector may well ramp up its participation.

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