US: Buying behaviour centred on current California vintages

Dan X. Mcgraw

18-Apr-2016

Traded volume has increased during the first fifteen weeks of the year, but entities are showing more appetite for current vintage allowances rather than vintages that are further out on the curve, according to Intercontinental Exchange (ICE) data.

ICE data shows that 124m allowances have traded from the start of the year to 14 April. That volume represents a 51% increase over the 81.8m allowances traded or cleared on ICE during the same period in 2015.

Most of that volume — 80.9m — came in February as California carbon allowances (CCAs) fell below the $12.73/tCO2e floor price for the first time. The CCA decline was preceded by large declines on the Regional Greenhouse Gas Initiative (RGGI) market.

The large volume of Vintage 2016 allowances sold this year is likely tied to the decline on the secondary market. The nearly 81m Vintage 2016 allowances sold or cleared on ICE could be tied to entities who were forced to liquidate some of their positions.

While traded volume is up, entities are shifting their buying behavior. ICE data shows fewer allowances are being purchased further out on the curve, but entities are increasing their interest on the current vintage allowances.

Multiple traders attributed the shift in buying to entities concerned about the pending lawsuit that argues the state’s auctions are an illegal tax. Entities are worried that if the state loses the case that the price could decline significantly.

A trader from a trading house said few entities are willing to take any length in the market now, because they are worried about the value of those allowances dropping.

“Nobody wants to go more than two years out,” the trader said.

Prior to this year, entities showed more willingness to purchase allowances further out on the curve, because those allowances could increase in value as programme’s floor price increased.

Future vintages accounted for 50.5m of the 81.8m allowances sold from 1 January to 14 April of last year. For comparison, future vintages account for 23m of the 124m allowances sold during the same period this year.

The low interest in future vintages also showed up in the first auction. The ARB sold 9.4m of the 10.1m Vintage 2019 allowances on offer, or nearly 93% of the allowances available for purchase. That percentage was the lowest since August 2014.

Market participants said the perception of increased risk has caused entities to shift their behavior. While the risk has not fundamentally changed, some entities are showing more concern about the pending lawsuit after suffering losses in the RGGI.

By reducing their positions further out on the curve, entities are looking to minimize their risk if the court rules that the ARB auctions are an illegal tax. Some entities had told ICIS that they were looking to flatten out positions this summer because of that reason.

It is unclear whether long-term buying will increase with more certainty from the pending lawsuit. dan.mcgraw@icis.com

READ MORE

Global News + ICIS Chemical Business (ICB)

See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.

Contact us

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?