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Weekly Commentary: Trading at the ICE exchange revives after Thanksgiving lull; trading horizon expands to 2022

December 9, 2019 by Anant Jain

CaliforniaCarbon.info, December 9, 2019: After a quiet Thanksgiving week on the InterContinental Exchange, trading of California Carbon Allowances (CCAs) picked right back up on Monday, when 30 percent of the weeks total volume was traded. The total traded allowance volume as of Friday climbed back up to a healthy 12,537,000 tons from the 8,878,000 tons a week before.

A total of 6,680,000 contracts opened last week. While market participants mostly targeted the Dec 19 and the Dec 20 deliveries as has been in the past, we observed an increase of 2.6 million in open contracts for December 22 delivery of the Vintage year 2022. Additionally, last week’s volume trade for the V22 Dec 22 security stood at 2.8 million units. Clearly, market participants purchased the security with a long outlook. The purchase of these deliveries, due in the next compliance period (2021-2023), may indicate the presence of ‘carry-trades’ where financial providers with lower internal costs of capital, ‘carry’ instruments on behalf of the entities until the time of surrender.

Allowance prices on the other hand gradually abated through the week. The Dec 19 and Dec 20 deliveries for the current vintage witnessed a decline of 5 cents and 7 cents closing at USD 17.18 and USD 18.13 respectively. This price movement occurred despite an increase in trading volume of 0.5-fold and 10-fold and a net increase in open interests of 120k and 1200k. A similar price decline was visible across the wider market, pointing to bearish expectations due to the supply of allowances from the November auction and the expected disbursement of the annual allowances on Friday.

The California Air Resources Board (CARB) released the annual allowance allocation summary for 2020 on 6th December, Friday (Read full report here). The report presents that the Petroleum Refining and Hydrogen Production sector received a 55 percent higher CCA allocation over 2018. Whereas Cement Manufacturing with forecasted growth in emissions received a minor increase (4%) in allowance from the previous year. Lastly, the Fruit and vegetable canning category comprising of 18 facilities received a 190 percent markup, from 292,309 CCAs to 848,275 CCAs. Minor changes were observed for remaining categories from their previous years’ allotment.

Analyst contact: 

Anant Jain (anant.jain@californiacarbon.info)

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