Stable front end, low volumes, as Joint Auction 2 approaches

February 16, 2015 by CaliforniaCarbon.info

CaliforniaCarbon.info, February 16, 2015: Traded volume for California carbon allowances (CCAs) on the InterContinental Exchange (ICE) last week sank to 1,530,000, barely 20 percent of the previous week’s volume, and the lowest yet seen since the commencement of the second compliance period (CP2) under the California cap-and-trade program. Compared to earlier weeks, the front end contracts remained extremely stable, with the V2015 – set to see 73.6 million in auction volume enter the market – trading within a 2-cent weekly range, and closing 1 cent up on last week, at $12.66.

Further back, deliveries appear to have realigned with the annual rates of carry witnessed in January. In the first week of this month, when a combination of refinery disruptions and likely pre-auction sell-side entry served to deflate front-end prices, the Dec 15/Dec 16 spread had widened by 6 cents up to $0.53. This week’s movements see the spread narrow to $0.49 while the 2015 contracts hold steady.

Excepting the 845,000 V2016 Dec 15 volume from Tuesday, the V2015 continued to see the most activity, with traded volume divided amongst several delivery dates traded across the latter half of the week. The March and April contracts fetched 180,000 and 158,000 in volume respectively, which could conceivably be delivered upon using auctioned CCAs. The secondary market has tended not to fulfil its potential around the time of the auctions. Last year, fewer than 1.5 million V2014s were contracted for delivery between March and June across all trading dates in Q1. It remains to be seen if the increased cap (and holding limits), and the entry of new sectors and Quebec entities will make a difference this year.

The later-dated vintages demonstrated slightly more price movement through the week. The V2017 Dec 15 contract dropped 6 cents on Tuesday to regain 8 cents on Wednesday, ultimately closing 5 cents up on the previous Friday, at $12.74. The V2018 had a similar experience. The V2018 Mar 15 now stands at $12.49, 6 cents up. It may provide more confidence to advance auction participants than had been feared after the previous week’s 25-cent collapse, although there has still been no contracted volume in the last week. The auction will clear at no lower than $12.10.

The greater fluctuation on the later-dated vintages is likely to be in line with a market that is still reacting to how movements in the various energy markets are likely to affect its fundamentals, and in this context it is likely the auction which is acting as a steadying influence for early-vintage prices. There is, in particular, underlying uncertainty over the implications of recent developments in the global crude markets. While the sagging prices over the last two months could work to hold back compliance-led demand from the refinery sector, many also point to possible ‘rebound effects’ in terms of increased fuel consumption as well as oil-gas crossovers. ‘I think many are still trying to work out which way the oil prices are going to cut with the market for carbon allowances,’ remarked one consultant.

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

  • Facebook
  • Google
  • LinkedIn
  • Twitter
  • Email