May 17, 2015 by Rahul Rana
CaliforniaCarbon.info, May 18, 2015: In the last full week of trading before the third Western Climate Initiative (WCI) carbon auction for regulated entities in California and Quebec, the InterContinental Exchange (ICE) saw 12,003,000 allowances trade by futures contract. This was well over double the previous week’s tally of 4,973,000, and nearly equaled the cumulative volume of 12,431,000 from the prior four weeks. These volumes reflect healthy interest in the market, and may bode well for the auction.
A large portion of this volume comprised symmetrical trade pairs, with equal amounts on the first leg in May or June 2015, and on the second leg in December. Large pairs of block trades were recorded for the V2015 (2.2 million combined, on Thursday), and particularly the V2017 (600,000 each on Wednesday and Thursday, 1 million on Friday) and the V2018 (5 million on Wednesday, and 1.7 million on Thursday – split into 1.2 million in 2 blocks plus 500,000 as a two-legged spread). Together, these accounted for 92.5% of weekly ICE volume.
There are suggestions from market participants that much of these reflect positions being rolled out to December, as traders look to take advantage of the implied sub-2% funding rate on offer. However, this would not be the only possible explanation. The profiles of these trades would not be inconsistent with the procurement behavior previously exhibited by some of the largest compliance entities. Alternatively, compliance players may be simultaneously structuring multiple forward deliveries for expected purchases at this as well as a subsequent auction.
In addition to racking up 2,803,000 in ICE volume, the V2015 also made small price gains during the week. The end-of-year benchmark rose three cents to close at $12.71, while front-end prices rose by four cents. The June 2015 contract closed Friday at $12.59, some 49 cents above the auction floor. If prices hold up this week, there may be support at the current auction in the $12.20s or perhaps even the low $12.30s, which may enable it to clear at a higher price than the February one did ($12.21).
Interestingly, while prices inched up for allowances with vintage years up to 2016, for the V2018 they fell on Monday and Tuesday by up to seven cents at the front end. Fewer than 3 million V2018s had previously traded on ICE, and these price developments potentially incentivized the levels of activity that produced a weekly volume of 6.9 million. In tying up current and expected spot volume for forward delivery, the secondary market may enable stronger performance at the advance auction. Just like in February, 10,431,500 V2018s will be offered, and ICE open interest for the V2018 now stands at 8,825,000. The February advance cleared at the floor of $12.10, with a cover ratio of 1.02.
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