Prices for RGGI Allowances (RGAs) tumbled to their lowest in 21 months as a combination of bearish sentiment surrounding the prospects for the Clean Power Plan and liquidation of speculative long positions triggered a wave of selling.
The vintage 2016 futures for Dec-16 delivery fell to a low of $4.75/short ton early Tuesday morning, sources reported, representing a daily drop of $1.75 or 27%.
The benchmark contract was quoted at between $5.25-5.50 at the time of writing.
“Last night there was a block trade for 2.3 million allowances at $5, after the futures settled at $6.50,” a New York-based trader said.
“They traded down to $4.75 this morning, and there’s been another 4 million tons traded.”
RGA prices have lost as much as 45% since hitting a record $8.60 on Jan. 26.
The last time they changed hands at $4.75 was in May 2014, according to RGGI data.
“Everyone’s talking about a player that needed to get out” of a long position, the trader said, adding “and once that one trader got out, everyone else decided they had to follow.”
“Financials started to unwind their positions after they saw the initial price drop, which was likely initiated by a major trading shop. Consequently this accelerated the decline of RGA prices. There is still a chance that RGA prices rebound later in the year due to concerns of future price escalation, but I’d ballpark that scenario at a 50/50 of occurrence,” said Thomson Reuters analyst Tom Marcello.
Market participants also pointed to a number of additional factors that have helped push prices lower, including the US Supreme Court’s decision last week to suspend enforcement of the EPA’s Clean Power Plan.
“[It] was what kicked things off,” a New York-based broker said.
“People are worried about the stay.”
However, a number of states have indicated they will continue to develop compliance strategies, and Justice Antonin Scalia’s untimely death over the weekend could prevent the now evenly-split Court from officially striking down the rules later this year or next.
Lower 2015 RGGI emissions have also added a bearish tone to the market, the broker said.
The market administrator last week published data showing that full-year emissions fell 4% from 2014, with output hitting a record low in Q4.
Analysts at Thomson Reuters last year said that while RGGI remains heavily over-supplied, more than 80% of the surplus is being held by speculators, supporting the view that this growing segment of the market has led the recent RGA sell-off.
By Alessandro Vitelli – news@carbon-pulse.com
