April 26, 2015 by CaliforniaCarbon.info
CaliforniaCarbon.info, April 26, 2015: 3,547,000 California carbon allowances (CCAs) were contracted on the InterContinental Exchange (ICE) for forward delivery within 2015 on Thursday and Friday alone, surpassing the foregoing traded volume from April of 2,940,000. With some minor activity on the V2015 earlier in the week, weekly traded volume came to 3,649,000, with 2,579,000 falling on the prime 2015 vintage.
Across the entirety of April to date, the 4,240,000 V2015s contracted for forward delivery are a fraction of the 76.9 million allowances to be offered at next month’s current auction, a number which includes some 1.95 million Quebec V2013 allowances that went unsold at the province’s inaugural cap-and-trade auction in 2013. Since the last auction in February, just under 18 million V2015s have traded on ICE, widely regarded as the primary venue for California carbon trading.
Any healthy secondary market volume would possibly both enable and signal confidence in strong performance at the next auction. Compliance-side participants may be likely to bid more aggressively or voluminously if the secondary market is sufficiently active as to provide confidence in the supply of carry trade services. Furthermore, the transfer of some spot volume onto other counterparties could decrease the amount of spot risk which a participant faces, in addition to freeing up space within the holding limits. On the other hand, the degree of participation from speculative players ahead of rather than after the auction may reflect perceptions of the likelihood of a positive (versus negative) price discovery.
In this context, the flurry of activity on Thursday and Friday may provide mild encouragement. 2,477,000 V2015s underpinned the late-week surge in volume, split somewhat evenly between Q2 deliveries (1,301,000) and December deliveries (1,176,000). With the slight recline in the forward curves through December 2015 seeing front-December spreads narrow over the week by three cents on all vintages, perhaps some participants were tempted into action. The V2015 and V2017 saw 51,000 and 100,000 respectively in spread volume on Friday, as positions were likely rolled out from April to December this year.
On most vintages, prices adjusted themselves throughout the week but finished within one or two cents from where they closed the previous Friday. The exception was the V2018, which saw a near-uniform five-cent rise across its forward curve; the front June 2015 contract has now inched up by ten cents in the last two weeks, and fourteen in the last four. Friday brought 750,000 of volume to the V2018 Dec 15 delivery (ICE will confirm the change to open interest tomorrow), as one trader potentially took advantage of the increased price on offer. It remains to be seen if the third WCI joint auction will produce a stronger outcome on the forward vintage than the second did. In February, 10.4 million V2018s entered the market at the floor price of $12.10 as the advance auction barely cleared with a cover ratio of 1.02.
The late-week mini-spike in activity may prove to be merely an anticipation of a quiet week for screen trading with most traders out at the NACW conference in Los Angeles from Tuesday through Thursday. Friday was also the last day to trade April 15 contracts, with the 971,000 contract volume contributing over a quarter of weekly traded volume. After NACW, there will be one full week of secondary trading before participants’ bid guarantees are due on May 11, after which expectations for auction performance may emerge even more clearly.
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