US: RGGI prices find floor ahead of the auction

Regional Greenhouse Gas Initiative (RGGI) allowances stabilized on Tuesday after shedding 2.5% of its value since mid-May, and market participants said prices are unlikely to see additional declines before the June auction.

RGGI, which regulates power emissions from nine northeastern states, has steadily declined on the secondary market since 13 May. RGGI front-month allowances have declined from $5.53/tCO2e on 13 May to $5.39/tCO2e on 26 May. The Dec ‘15 Vintage 2015 contract has experienced similar declines over the same period.

Market participants gave mixed opinions about the reason for the decline. Some pointed to bearish sentiment and lower demand ahead of upcoming auction of 15.5m RGGI allowances. But others said the decline is the result of market fundamentals.

RGGI released emissions data in early May that showed compliance entities emitted around 23.4m tCO2e during the first quarter of 2015. Over the same quarter, RGGI market reports show compliance entities purchased an estimated 33m allowances through auctions and on the secondary market, meaning 10m allowances could be hedged for future compliance needs.

“Fundamentals aren’t really supporting the higher prices,” a broker said of the RGGI market.

A second broker said it was too early to determine whether the decline is the result of the market fundamentals or the upcoming June auction. However, he said some of the decline could be traced back to the market unloading allowances at the beginning of the month.

“That certainly seemed to be profit taking,” he said.

Data from the Intercontinental Exchange (ICE) shows roughly 3m allowances have been sold since 13 May. Most of those allowances were for Dec ‘15 deliveries. RGGI transaction data does not show a significant number of deals, but those future contracts could reported later this month after they are delivered to counterparties.

Sell off

Two traders at different trading houses said a large market participant had offloaded allowances during the month and could have put some of the bearish pressure on the secondary market.

Those entities said the participant had built up a large position in the market, but the company had begun to liquidate its position. Traders did not disclose on the record which company was behind the sell off.

With that activity over, traders said the market had appeared to find a floor ahead of the upcoming June auction. Prices stabilized on the secondary market at $5.39/tCO2e for a May ‘15 Vintage 2015 contract, a $0.01/tCO2e rise from the previous day.

“[We] definitely found a floor,” a broker said of the market. “There is some support here.”

One of the traders added there appeared to be price support at the $5.40/tCO2e level for Dec ‘15 Vintage 2015 contract, which was valued at $5.46/tCO2e on Tuesday. Market participants did not expect RGGI allowances to shift much before the June auction.

RGGI will auction off 15.5m allowances on 3 June auction. An additional 10m allowances from the cost containment reserve can be purchased if the clearing price clears above $6.00/tCO2e. The results will be published at 10am Eastern Time on 5 June. dan.mcgraw@icis.com