February 28, 2018 by Ronjoy Bezbarua
CaliforniaCarbon.info, February 28, 2018:
Summary: WCI’s fourteenth joint auction has cleared for the fourth consecutive time at a settlement price of USD 14.61 for the Current Auction and USD 14.53 for the Advance. The current auction was oversubscribed with a bid-to-cover ratio of 1.21 while the advance auction was undersubscribed with a bid-to-cover ratio of 0.69, with 120 qualified bidders (64 from California, 35 from Ontario and 21 from Quebec, as per our initial estimate).
The auction cleared a full 8 cents over the current floor price of USD 14.53 in case of the current vintage. This auction is the first auction held after Ontario merged with the rest of WCI at the beginning of this year.
Short-term Market Impact
All 98,215,920 allowances on offer in the 14th Joint Auction (Current) cleared at USD 14.61 with a bid ratio of 1.21. This was the first joint auction in which the province of Ontario had participated in.
“The success of the sale reflects strong demand in the three jurisdictions and confidence in the market going forward,” said Katie Sullivan, IETA’s managing director. “The linkage between three markets increases the liquidity in the market and boosts opportunities to reduce emissions at lower cost.”
The Advanced Auction saw a more conservative performance with 8,576,000 allowances clearing out of 12,427,950 V2021 allowances on offer clearing at a bid-to-cover ratio of 0.69.
Despite the more certain direction of cap-and-trade over the last year till now, especially after the implementation of AB 398 and the recent linkage with Ontario (along increased political uncertainty for the PC party), the below par interest in future allowances reflects the lack of urgency in the market to start securing positions for future compliance obligations. The V2021’s on offer settled at floor price of USD 14.43.
CCI Analyst Take:
This isn’t a surprising result for the market, the post-auction month open interest itself had proved a strong indicator of auction performance, as we discussed in our previous Outlook reports. The current auction cleared as per our conservative expectations where we had predicted it to clear at 10-15 cents above the current floor price of $14.53. This signals that the market currently appears to be ready to absorb the additional allowances offered in this auction even though it faces no urgency on the demand-side as the majority of V2018s will only be required in 2021. The current auction’s clearing reflects this non-urgency to procure V2018s and this also allows entities to wait out Ontario’s election results.
Market participants would have expected the auction to clear lower than the secondary market price prevailing during the bid qualification week i.e USD 14.86 and traders have taken this opportunity to get allowances from the auction at comparatively lower prices.
As pointed out in our last auction outlook, a fully subscribed auction with a floor to clearing price gap of 10-15 cents, will likely push the front to trade 35-40 cents above the current floor i.e. US$ 14.88-US$ 14.93. We have witnessed this happen prematurely yesterday when the current front V18 Mar18 traded at $14.90. We can expect the secondary market price to rise lazily till the May auction, assuming the same fundamentals continue.
Cumulative surplus reached the level of 78.4 million at the end of Q1 2018 after a fully subscribed auction which offered an additional 14,849,520 unsold V2016s allowances.
CC.info will be releasing a deeper statistical breakdown of trends and observations from the latest joint auction in our After-Auction Review. For more information about CaliforniaCarbon.info’s comprehensive Auction Data Suites, please contact firstname.lastname@example.org.
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