US: Market expects prices to rise during first joint auction

Traders are expecting the first joint auction between Quebec and California to rise significantly above the previously four auctions because of healthy demand from fuel suppliers who are entering the programme next year and the rising price on the secondary market.

The Air Resources Board (ARB) and Quebec’s Ministry of Sustainable Development, Environment and the Fight against Climate Change (MDDELCC), who both regulate the cap-and-trade programme, will be auctioning off 23.1m Vintage 2014 and 10.8m Vintage 2017 allowances on Wednesday. The results will be posted on 26 November.

The auction will mark the first joint auction since Quebec and California officially linked in January, and it will be the last auction at the current floor price of $11.34/tCO2e.

Most market participants said the Vintage 2014 allowances should clear in the $11.75-11.90/tCO2e range, or significantly higher than the $11.48-11.50/tCO2e range over the past four auctions. Traders said the inclusion of fuel suppliers next year and the anticipation of the 2015 floor price, which should be around $12.10/tCO2e, should give bullish pressure to the auction.

“I don’t think that range would shock anyone,” a broker said of the predicted clearing ranging. “If we clear north of $12.05/tCO2e, things could get interesting.”

That prospect could happen if fuel suppliers are willing to buy allowances closer to the projected floor price for 2015, a trader from a trading house added. The source said the result could be a price just above $12.00/tCO2e, but it would require strong demand from fuel suppliers and a more bullish view from current compliance entities.

Traders said the 2015 floor price should have an impact on the final auction clearing price, because it could act as a price point that few bidders are willing to cross. Traders said fuel suppliers and current compliance entities are likely trying to buy allowances at just below the forecast floor price.

“They won’t be too much demand above that [price],” a trader from a compliance entity said.

Traders said a clearing price near the current $12.15/tCO2e secondary price could spur more bullish sentiment in the market, but it is unlikely because of the oversupply in the current market. A lower-than-expected clearing price, however, could have the opposite impact on the market.

The market has seen prices rise steadily over the past few months, mainly because of increased demand from fuel suppliers and compliance entities and the anticipation of the 2015 floor price.

Supply, Quebec could be bullish

Market participants are still unsure about the impact of Quebec compliance entities and significant increase in supply on the auction clearing prices. Both are seen as bearish pressure on the market.

Traders have previously voiced concerns that there may not be enough compliance-driven demand to cover the 23.1m Vintage 2014 or 10.8m Vintage 2017, which are some of the largest auctions since the inaugural November 2012. By in large, traders do not expect the Vintage 2017 allowances to sell out, because they failed to sell out during the last Quebec and California auction.

Quebec companies may have a more bearish impact on Vintage 2014 allowances. Market participants are unsure of how Quebec companies will bid in the first joint auction, because those entities have not struggled to buy allowances at auction. Because of that previous experience, they may bid closer to the $11.34/tCO2e than the current forecast 2015 floor price. Dan X. McGraw