US: Traders expect auction to clear near floor again

Vintage 2014 California carbon allowances (CCAs) are expected to settle in the $11.48-11.58/tCO2e range in the upcoming auction while the future vintages should settle at the $11.34/tCO2e floor price again and not sell out, market participants said.

The Air Resources Board (ARB), the cap-and-trade regulator, is auctioning off 22.5m current and 9.3m future allowances on 18 August ( see EDCM 23 June 2014 ). The results will be posted at noon pacific time on 21 August.

Traders said prices may settle slightly higher than the $11.50/tCO2e May auction clearing price because of additional demand for Vintage 2014 allowances from companies looking to meet the full compliance deadline in November 2015 ( see EDCM 22 May 2014 ).

Compliance entities will have to cover 70% of their 2013 emissions and all of their 2014 emissions in November 2015 with either Vintage 2013 or 2014 allowances. The remaining 30% of the 2013 emissions will be surrendered this November as part of a partial compliance deadline.

The final two auctions of the year will be compliance entities’ last chance to buy Vintage 2014 allowances, which can only be used for the November 2015 deadline.

Even with those dynamics, market participants are not expecting a bullish market for CCAs at auction, primarily because of the oversupply of allowances in the current market and large supply on offer at the auction. A broker said prices could rise as high as $11.57-11.58/tCO2e, but other market players believed the supply of vintage 2014 allowances could push prices slightly below $11.50/tCO2e.

Traders and brokers polled by ICIS believed the settlement price would fall close to the $11.48-11.50/tCO2e range. Current vintage allowances have been stuck in the $11.48-11.50/tCO2e range for the past three auctions.

“Prices will probably be close to the floor again,” a trader at a compliance entity said. “There may be some slight upward pressure (on prices) as we approach the end of the compliance period, but there may be also some downward pressure because of the larger supply.”

The current vintage supply of 22.5m is the highest auction volume since the inaugural November 2012. The ARB auctioned off 23.1m current allowances during that auction.

Future vintages unlikely to sell out

Market participants are also predicting the future vintage auction will not sell out next week. If that happens, it would be the second consecutive auction and fifth time ever that the future allowances failed to sell out.

In May, the ARB sold slightly over 4m Vintage 2017 allowances, or roughly 43% of the 9.3 allowances on offer. Under ARB rules, those allowances can not be used for compliance until 2017, and they have little use to current compliance entities.

Traders said the low interest in the vintage is tied to the low price expectations for the current vintage, which can be used in any subsequent year, and financial flexibility of buying the same vintage on the secondary market.

Vintage 2017 allowances are selling for $11.53-13.33/tCO2e depending on the delivery date, according to data from the InterContinental Exchange (ICE). If purchased on ICE, buyers could delay some of the financial costs until closer to the delivery date while buying at auction would require them to pay upfront. Dan X. McGraw