Undersold auctions changing CCA market dynamics as volumes reach a year-long high

April 3, 2017 by Rahul Rana

CaliforniaCarbon.info, April 3, 2017: Total weekly traded volume on California carbon allowances (CCAs) reached a year-long high with the entire volume traded on just the first two days of the last week. A total of 16,149,000 CCAs changed hands – over 2.8 times the previous week’s traded volume of 5,636,000 and 2.6 times the 4-week moving average of 6,118,750.

The current vintage accounted for 65% of the week’s volume as prices started to rise over the floor once again. The V2017 front climbed by 6 cents last week from USD 13.58 to close at USD 13.64 with the front also changing to Apr17 mid-week. In addition, the vintage saw 3,377,000 new contracts created in the last week alone.

This surge of interest in the V2017 was expected as the last auction reduced the supply in the market with only 18% of the offered 65,104,273 tons clearing. Using our forecasted demand for 2016, CaliforniaCarbon.info estimates that at the end of last year, the market surplus stood at 43.9 million and that 384,500,260 tons will be needed to meet obligations in 2017, thus the total estimated demand stands at 340,600,260 tons for the current year. The total budget for 2017 (APCR adjusted) is 414,220,800 tons, of which only 42,226,000 tons have been bought through past auctions – current and advance. This entails that the future auctions of the V2017 need to perform remarkably well to meet the expected demand. Some entities would not be willing to bet on the auction prices in the future and would most likely look to secure their positions through the secondary market, thus leading to an increased interest in the V2017 contract.  For a more detailed discussion on the auction impacts on secondary market, please register for our webinar on April 12, 2017 (link).

The V2018 witnessed substantial volumes for the first time in the last two months with a total of 4,950,000 tons contracted on the vintage.  However, unlike the V2017, the OI on V2018 was diluted to the tune of 3,250,000, including a symmetric trade between the Jun18 deliveries of vintages 2017 and 2018 which saw 950,000 tons being moved from the future vintage to the current for a spread of USD0.07 per ton. Important to note that the delivery date falls before the November surrender deadline when 100% of 2017’s obligations must be surrendered, while the V2018 cannot be used to meet obligations until November 2019.

As pointed to above, all this activity occurred only on the first two days of the week in question, while prices continued to increase in the latter half of the week. This could signify that the bid and the ask sides of the market have yet to come to agreement on how the balance has changed in the secondary market, and the coming weeks should prove critical for the short-term dynamics in the CCA market.

North of the border, Ontario’s cap-and-trade market passed without a single transaction for the third consecutive week. Market participants await the auction results due to be announced today. Unchanged from the previous week’s close, Ontario Carbon Allowances (OCAs) closed at CAD 18.41, but due to fluctuation in RBC daily exchange rate, it closed at USD 13.82, USD 0.05 above the previous week’s close of USD 13.77. It demands a premium of USD 0.01 above the current vintage equivalent in California.

Chandan Kumar (chandan@californiacarbon.info)

Rahul Rana (rahul@californiacarbon.info) 

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