US: Oversupply limits CCAs' drought-driven gains

28 January 2014 19:53 Source:ICIS

California carbon allowance (CCA) prices are expected to remain stable in the next fortnight after prices rose last week on the back of increased buying interest from electricity generators, traders said, as the oversupply of the system keeps a lid.

The benchmark Dec ‘14 Vintage 2014 contract was trading at $12.55/tCO2e (€9.28/tCO2e) on Monday, a rise of $0.35/tCO2e since 17 January, according to traders.

Power companies have been increasing their activity due to fears a drought in California could reduce the amount of CO2-free hydroelectricity they are able to generate. That could in turn increase the amount of carbon-intensive fossil-fuel electricity which is produced inside of the state.

“For the time being, it is power-driven,” a broker said of the recent demand.

But as the system is oversupplied, prices are not expected to extend gains and traders think they will remain flat ahead of the next Air Resource Board (ARB) auction on 19 February.

Market participants said most of the volume recently has centred on three contracts - Dec ‘14 Vintage 2014, Dec ‘15 Vintage 2016 and Jan ‘14 Vintage 2016. Those contracts made up more than half of the total 8.31m tonnes of volume cleared and dealt on the IntercontinentalExchange (ICE) over the past 10 days.

Traders said the Dec ‘14 Vintage 2014 and Dec ‘15 Vintage 2016 are expected to continue to attract suitors ahead of the Air Resource Board auction on 19 February. The ARB will be auctioning off 19.54m Vintage 2014 and 9.26m Vintage 2017.

Future compliance entities

Nearly 2m Vintage 2016 allowances changed hands Monday as future compliance entities, such as fuel suppliers, continued to ramp up their activity in the California carbon market.

Traders said 1.1m Dec ‘15 Vintage 2016 allowances changed hands at $12.68/tCO2e on Monday, a slight decline from the $12.75/tCO2e that traders had reported on Thursday. The Jan ‘14 Vintage 2016 allowance is being dealt at $12.00/tCO2e.

“It is probably future compliance entities,” said a trader at a trading house. “It could also be liquidity providers [financial companies and speculators] who are holding on to them until there is more interest from future compliance entities.”

The Dec ‘15 Vintage 2016 contract had seen relatively little activity through the first half of 2013, but since August 2013, more than 15.4m allowances were dealt secondary market, according to data from the ICE.

The contract has seen steady interest in 2014 as more than 3m allowances have sold so far this year. The contract could see increased demand as compliance entities become more active in the CCA market ahead of their inclusion in the programme in 2015. Dan X. McGraw

By Dan X. McGraw