February 1, 2015 by Rahul Rana
CaliforniaCarbon.info, February 1, 2015: Prices rose across all contracts for California carbon allowances (CCAs) offered on the InterContinental Exchange (ICE) in the past week, with a weekly volume of 4,616,000 CCAs bringing the monthly total for January up to a whopping 43.2 million. For 2013, all entities covered under the second compliance period (CP2) of California cap and trade reported emissions totaling just under 348 million.
The front-heavy profile of ICE trading over the past few weeks, for which the entry of the CP2 sectors was partly responsible, has likely tightened short-run supply. Reports of the Sierra Nevada snowpack standing ‘far below normal’, after January saw 12% the historical average level of rainfall, likely accentuated these constraints.
As a result, uniform two-cent climbs were witnessed on Thursday and Friday across all instruments, adding to gains made earlier in the week. The benchmark V2015 contract closed the week at $13.01 (viz. $12.95 last Friday), while the V2018 contracts, hitherto untraded on ICE, closed up to nine cents up on previous week figures.
Even so, the end-of-week peaks did not coincide with heavy activity. 4,590,000 in traded volume was spread across Monday, Tuesday, and Wednesday, and only 26,000 exchanged on Thursday and Friday.
V2015s continue to dominate secondary market activity, and this week they made up nearly half of ICE volume with 2,276,000. 970,000 of this volume was squeezed in on Monday and Tuesday for Jan 15 deliveries before the Feb 15 took over as the front-end offering.
Another 500,000 was exchanged on Wednesday for Jun 15 delivery, and was likely part of a complex swap trade involving 1 million V2016s to deliver in July and December this year, according to at least one broker. On Wednesday, the divergent movements of the mid-year V2015 and V2016 contracts widened that particular spread from 3 to 8 cents, with the V2015 being the more expensive.
It remains to be seen how much longer the front end can continue to rise and narrow the spread to the benchmark. With 73.6 million CCAs set to be pumped into the joint market (with Quebec) later this month through the auction, it is likely the present supply-led prices will ease downwards.
Market participants continue to hold that the fundamental length of the market means the present bullishness is unlikely to last. “Recently, the implied cost of carry has been reduced significantly as bid interest in the front-end has not equated to proportional movements in the back-end. Should front-end bids wane, we could see implied carry rates move back up to 3%-4%,” remarked Mark Struk from consulting firm Alpha Inception.
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