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OTC averages highest since pre-Feb auction; weekly ICE volume highest in 2014

April 12, 2014 by CaliforniaCarbon.info

CaliforniaCarbon.info, April 12, 2014: Both prices and interest seemed to have picked up in the week just past, as aggregated broker price marks show instruments closing the week’s trading at prices higher than any since the last auction in February, while a total of 5,456,000 California carbon allowances (CCAs) were contracted on the InterContinental Exchange (ICE), the highest seen so far this year.

CCAs going over-the-counter (OTC) averaged $12.01 (V2014) and $12.40 (V2016) on Friday, the highest they have traded at since the February auction price discovery brought prices down from $12.20 to $11.83 (V2014) and from $12.55 to $12.30 (V2016). The broker-mediated spot market reflected a similar statistic. The week closed at $11.71, the same level to which price discovery had earlier brought trading in February. In the intervening period, the instrument had lost a further ten cents. Week on week, the V2014 and V2016 OTC instruments gained sixteen and eight cents respectively, or 1.4% and 0.7%, while the spot instrument gained six cents, or 0.5%.

Although ICE prices have remained more stable, the return of volume will be viewed as a positive sign. For reference, the current benchmark instrument – the V2014 delivering this December – gained five cents over the week, moving up from $11.95 to $12.00 (+0.4%), while the forward benchmark instrument – the V2016 delivering next December – gained nine cents over the week, moving up from $12.21 to $12.30 (+0.7%).

The past week saw a total of 5,456,000 CCAs contracted via ICE (up till Thursday – Friday’s figures were not uploaded to the ICE Data Centre at the end of the week), surpassing the previous 2014 weekly high of 5,140,000 – set in the first full trading week back in January – by 6.1%. The bulk of the traded volume was contributed by the V2016, which alone witnessed 4,075,000 instruments contracted, including 2,525,000 December 2015 deliveries on Thursday alone. 795,000 V2013s were contracted, 730,000 of which were for delivery within this month. 586,000 V2014s were contracted. The total volume was an 11.2-time increase upon the previous week’s contracted volume of 487,000, itself a 13.5-time increase upon the 36,000 of the week before (a highly anomalous figure, perhaps because it coincided with NACW).

With the next auction less than five weeks away, the increase in volume may suggest that participants may be structuring deals on the basis of projected auction outcomes. It might be believed that there is little downside risk to taking an early position with the current prices so close to the price floor of $11.34. Several market commentators have frequently repeated the suggestion that prices will creep upwards from one auction to another within 2014, as utilities adjust their consignment strategy forwards (releasing more allowances earlier in the year, when last year they released more of them late and produced a price drop in the August and November auctions), and – much more importantly – the market works towards its first ever surrender date. Compliance entities must retire instruments (allowances and offsets) this November enough to cover for 30% of their emissions in 2013. This surrender date comes before the fourth auction of the year.

For more information regarding this article, please write to contact@californiacarbon.info.

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