RGGI’s secondary market heating up, but bearish bets mounting -report

Published 13:41 on November 24, 2015  /  Last updated at 13:41 on November 24, 2015  /  Americas, US  /  No Comments

Secondary trade in RGGI allowances heated up in the third quarter, according to a report by the market’s monitor, but a rise in activity in options trading suggested that participants could be preparing for record-high prices to fall.

Secondary trade in RGGI allowances heated up in the third quarter, according to a report by the market’s monitor, but a rise in activity in options trading suggested that participants could be preparing for record-high prices to fall.

Exchange-based trade in RGGI futures jumped 80% quarter-on-quarter and 373% year-on-year, while options contract volumes and overall open interest also rose, according to report by Potomac Economics.

However, the share of bearish bets reflected in the options activity increased markedly, pointing to expectations of a possible price correction.

Front-year RGGI allowance futures settled at $7.18/short ton on Monday, retesting their all-time high touched last Wednesday, as bullish sentiment built following last week’s stakeholder meeting to review the scheme ahead of its next compliance period in 2018-2020.

The report also highlighted the growing role of speculators in the market, with compliance entities holding just 64% of the allowances in circulation, compared to 80% a year ago.

Below are Carbon Pulse’s main takeaways from the report:

PRICES

– RGGI allowance futures prices averaged $6.25 in Q3 on ICE, up 13% from Q2 and 28% from Q3 2014.

TRANSFERS

– Total amount of allowances physically transferred between unaffiliated firms was 25.2 million units during the quarter, up 67% from Q2 and up 56% from Q3 2014.

– Average physical transfer price recorded in the market’s registry, known as the RGGI CO2 Allowance Tracking System, or COATS, was $6.14 – some 11% above Q2 and 25% above Q3 2014.

FUTURES

– Total volume of RGGI futures traded on ICE was 52.7 million, up 80% from 29.3 million in Q2 and up 373% from 11.2 million in Q3 2014.

– Around 23% of the traded volumes were done in contracts that expired during the quarter, with an additional 57% transacted on the Dec-15 futures.

– Total open interest in the RGGI futures peaked at 41.9 million on Sep. 27 but ended the quarter at 38.5 million, up 27% from Q2.

OPTIONS

– Options contracts worth a total 29.9 million allowances changed hands, up from 26.8 million in Q2.

– Some 60% of that volume was done in put options, compared to 19% in the previous quarter.

– Open interest in the puts rose by 50% quarter-on-quarter.

– Open interest across all options contracts rose to 70 million, a 23% quarterly gain.

– The strike prices seen on the traded puts ranged from $5.25-6.50, while those on the calls ranged from $5.75-8.00.

HOLDINGS

– Of the 202 million allowances in circulation at the end of Q3, compliance entities held around 130 million or 64%, of which an estimated 81% was being held for compliance purposes.

– Comparatively, compliance entities held 69% of the 169 million allowances in circulation at the end of Q2, and they held 80% of the roughly 385 million allowances in circulation at the end of Q3 2014, indicating that speculators are increasing their participation in the market.

Download the Potomac Economics report here.

By Mike Szabo – mike@carbon-pulse.com

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