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Market volatility continues as Ontario prepares for future linkage

September 25, 2017 by Ronjoy Bezbarua

CaliforniaCarbon.info, September 25, 2017:  The California carbon allowance (CCA) market saw significant ups and downs last week with a price range of USD 0.16, further solidifying our views that the volatility in the CCA market has increased for good. The rise in price volatility can be traced to the passing of AB398 which confirmed that the cap-and-trade program would extend till 2030 and also confirmed (via further analysis) that the program will be short by the middle of the next decade. Participants are now buying allowances and capitalizing on the market surplus while keeping the consensus on the present discounted value of this surplus in a wide margin which is (and will keep) creating the unfamiliar volatility in CCA prices. These trends, which would have previously been unconventional, appear to have become the new norm.

Prices rose on Monday and saw a significant downward momentum on Tuesday and Wednesday before picking up again from Thursday. The current front witnessed an overall loss of USD 0.03 for the week. A total of 6,741,000 tons were traded for the week, out of which 3,791,000 tons were traded when the prices were in decline. Of the remaining 2,950,000 tons, 2,389,000 tons were traded on Thursday and Friday when prices were still lesser than the previous weekly closing price.

A breakdown of last week’s trading shows that all vintages were traded except V2020. The V2017 contributed to the majority of last week’s trading activity with 5,660,000 tons (83.96%) and the V2018 traded 400,000 tons (5.93%) while the V2016 traded 396,000 tons (5.87%). V2019 traded after two weeks with 260,000 tons traded, all on Friday. V2015, last traded on 7th July, saw trade after almost 3 months with 25,000 tons exchanging hands (a contribution of 0.37% to the total volumes). Delivery-wise, trading was concentrated on two deliveries – Dec17 (67.57%), Sep17 (25.09%), while a small portion traded on Dec18 (6.60%) and Oct17 (0.74%). The Oct17 delivery traded for the first time last week.

Open interest had an overall net positive change of 2,783,000 contracts due to creation on the following deliveries – Sep17 (580,000 contracts added), Oct17 (50,000 contracts added), Dec17 (968,000 contracts added) and Dec18 (385,000 contracts added). The Dec18 delivery, which had seen dilution of contracts for three weeks continuously earlier, finally saw a trend reversal last week.

The Ontario carbon market, experienced gains in prices, despite a dip on Tuesday. On Friday, Ontario signed an agreement with California and Quebec to link their markets on Jan 1 next year, and create the world’s second largest carbon market. OCA front and benchmark prices rose by CAD 0.04 and CAD 0.03 respectively on that day raising the weekly price gains to CAD 0.08 for the benchmark and CAD 0.09 for the front. However, no trade or any change in open interest was observed for the week.

Ronjoy Bezbarua (ronjoy.bezbarua@californiacarbon.info)

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