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Weekly Commentary: Trading in the New Year starts off slow; poor OI creation leads to sluggish front

January 11, 2021 by Anant Jain

Summary:

  1. ICE Total weekly volume increases to 11.2M tons
  2. Market participants show almost equal interest towards V21 Jan21, Mar21 and Dec21 contracts.
  3. CCA front closes at $17.75, gaining $0.04 WoW

In the first full trading week of the New Year, a total of 11.2M tons of California Carbon Allowances changed hands at the InterContinental Exchange (ICE). Market Volumes increased after a slow trading week in the last week of 2019. 

Over 80% of the week’s volume was targeted at V21 contracts. The Jan21, Mar21 and Dec21 received a similar share between 21%-30% of the total week’s volume. A total of 2.5M tons of fresh positions entered the secondary market WoW. Again, the OI creation for the three deliveries remained similar and under 1M tons.

A large chunk of the week’s trade occurred on Wednesday and Friday, 3.74M tons were traded on Wednesday and 6.2M tons on Friday.

CCA prices increased on Wednesday by an average of $0.07 for current vintage contracts. The movement in the tail end was higher in magnitude. V26 instruments saw a gain of $0.13. The forward curve experienced some upward shift as a good start to the year. The CCA front closed at $17.75 on Friday, gaining $0.04 WoW.

However, current trading activity is dwarfed by last month’s levels. Perhaps, there was some apprehension around volatility in the attack on Capitol Hill on 6th January, but more likely we are witnessing the market’s cyclical compliance nature – which builds to crescendos around the auctions and at the year’s end. With weaker participation, real OI creation on the Jan21 delivery is unlikely before the month’s front switches over. Market participants are currently showing equal interest in the Mar21 and Dec21 positions, the February and auction deliveries may see a little more action.

The dynamics of the upcoming auction will be quite different than before. With the news of ongoing vaccine distribution among front line workers, the state-wide containment of the virus lies on the visible horizon. While the case for ‘true normalcy’ lies over 6 months away, the idea of risk-free operations may improve perceived demand for allowances at this auction. In the end, some entities may choose to bid much above the reserve price to secure necessary allowances for their future compliance needs. Thus there’s a reasonable chance that the auction may yet again oversubscribe with a small premium above the reserve price. The limiting factor here is that this is only the first of four auctions where V2021 will be offered in heavy volumes, so there will be entities who see no particular urgency to buy now rather than later on.

*WoW change reported between 31st December and 7th January.

Analyst Contact:

Anant Jain (anant.jain@californiacarbon.info)

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