US: Californian carbon market shifts from future to current vintages

Participants believe the market will continue to focus on current allowances through the rest of 2014. But the increasing demand is not expected to make a significant change in price because of the surplus of allowances in the current market.

Vintage 2014 open interest grew to 10.4m last week, a significant rise from the 4.7m reported at the beginning of May. The Vintage 2014 contracts are now making up 24% of the 43.3m total open interest in CCA market, ICE data showed on Thursday.

While the share of Vintage 2014 contracts is growing, the Vintage 2016 open interest fell to its lowest point since 4 June, according to the ICE data. The contract has stayed relatively stable over the past month as open interest has stayed in the 20-24m range since 21 May.

Vintage 2014 open interest has remained stuck in the 4.1-5.6m range for most of the year, but it has surged since topping 6.5m on 16 June. Traders said Vintage 2014 allowances should continue to attract more interest in 2014 because of the lower cost of capital and more compliance flexibility for those contracts.

Vintage 2014 contracts can be used to cover 2014 emissions, and the allowances can be used for compliance in any subsequent years. Vintage 2016 allowances can not be used for another two years under ARB rules.

Cost factor

A source from a trading house said the forward curve is ripe with attractive deals and a closer bid-to-offer spread, making them more appealing to compliance entities and speculators.

However, a broker added the shift may be a natural transition as compliance entities shape their positions ahead of the first full compliance period in November 2015.

“Most of the clean up around the Vintage 2016 is probably complete, and the Vintage 2013s are parked for forward compliance,” the broker said. “So the focus is on the current and Vintage 2017 for now.”

According to ARB data, more than 86m Vintage 2013 allowances and 43m Vintage 2014 allowances are set aside in compliance accounts. Those allowances can only be transferred to the ARB for compliance obligations.

The amount in compliance accounts represents about 40% of the 322.5m allowances dispersed in 2013 and 2014, according to ARB data.

Traded volume for V14s rises

Data from the InterContinental Exchange (ICE) shows the transition from the future curve to current curve as traded volume has surged on the Vintage 2014 since 1 May. While during a similar 47-day period, traded volume for the Vintage 2016 declined slightly.

From 1 May to 17 July, 13.4m Vintage 2014 contracts were traded or cleared on ICE. From 14 February to 30 April, 1.7m Vintage 2014 contracts were cleared or traded on ICE. Meanwhile, the Vintage 2016 contract declined 8% from 13.4m to 12.3m in the two 47-day periods.

A trader said the slowdown of the Vintage 2016 allowances could be because of the oversupply of CCAs or entities may be done hedging their compliance obligation for that vintage. The trader said speculative trades or hedging strategies likely have shifted to the Vintage 2017 contract.

The Vintage 2017 contract was not tradeable on ICE until May ( see EDCM 13 May 2014 ). Since then, 6.6m allowances have been sold or cleared on the exchange.

Market participants did not think the shift from the Vintage 2016 to the 2014 was related to the current ARB investigation into 4.4m offset credits. ICE data does not show any noticeable trend after the ARB announced the investigation on 29 May ( see EDCM 29 May 2014 ). Dan X. McGraw