Trading volumes and prices in the Regional Greenhouse Gas Initiative (RGGI) soared in Q4-2015, a report by the independent market monitor showed, but data indicated that traders had expected growing price volatility well before the February price crash.

The report, released by market monitor Potomac Economics, showed that 148.7 million allowances traded in the RGGI market in Q4, 94.6% more than in Q3 and 53.5% more than in Q4-2014.

Physical delivery of contracts amounted to 53.7 million, more than double the previous quarter and 24.3% higher than in Q4-2014, as emitters geared up for the December compliance headline.

But futures trading also increased to 95 million in Q4, up from just over 50 million in Q3-2015 and Q4-2014.

Open interest fell to 36 million by end-December, as nearly 40 million contracts were delivered in the last two months of the year.

PRICE HIKE

The Oct-Dec period saw a significant uptick in prices, with RGGI allowances trading at an average of $7.05 over the period, 13% higher than in Q3 and 37% higher than the last quarter of 2014.

The price rose from $6.60 in October to a high above $7.50 in December, the report said.

There were 55 options trades – 21 for puts and 34 for calls – booked on ICE during the quarter, down from 63 in Q3.

Puts made up 49% of the trading volumes, down from 60% the previous quarter.

The report also noted that trends in option trades indicated an increased expectation in the market that the price would become more volatile.

“Overall, option-implied volatility levels increased significantly from an average of 15.7 percent in the third quarter to 19.7 percent in the fourth quarter of 2015,” the report said.

Prices came tumbling down in mid-February, losing as much as 27% on Feb. 16 and hitting an intra-day low of $4.75 before stabilising above $5.

HOLDINGS

At the end of the quarter there were 213 million allowances in circulation, Potomac said, of which compliance firms and their affiliates held 136 million, or 64%. Some 90% of those had been purchased for compliance purposes, and the final 10% for speculative purposes, it said.

That estimate was notably lower than a December estimate by analysts Thomson Reuters Point Carbon, which said 44% of allowances were held by compliance firms, and a significant share of it for speculative purposes.

By Stian Reklev – stian@carbon-pulse.com

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