The RGGI market is heavily over-supplied but over 80% of the allowance surplus is being withheld by speculators, creating an artificial scarcity that will likely continue to push prices up next year and trigger the Cost Containment Reserve for the third year running, analysts at Thomson Reuters Point Carbon said.
After accounting for next year’s 2015 surrender process, compliance entities in the north-eastern market only hold 44% of banked allowances (RGAs), and a significant share of those have been bought for speculative purposes, the analysts said in a report published last week.
The rest is held – and withheld – by speculators, it added, creating a situation where prices continue to go up despite a substantial surplus.
“We estimate speculators are withholding about 81% [60 million short tons] of their RGA holdings from the secondary market,” the report said.
The overall supply-demand ratio in the market is 2.5:1, but when adjusted for withheld allowances, this drops to 1.2:1, the report showed.
The analysts predicted that the price, at around $7.40 currently, would move above $8 next year to deplete the Cost Containment Reserve, and reach $10.80 by the end of 2020.
“Artificial scarcity might be the primary reason underlying bullish RGA prices, but it is not the only reason. Bullish prices are also driven by persistent demand and hedging demand for banking,” it said.
Thomson Reuters expected overall compliance-related demand of around 66 million short tons next year, 1.6 million above the cap.
“Assuming even a small amount of speculator demand and our calculations suggest that demand will exceed supply in 2016 to the extent that the CCR allowance pool will once again get tapped and likely depleted. By 2017 overall demand will be less than supply and therefore we do not expect the CCR allowance pool to get tapped,” it said.
The report warned that the artificial scarcity will not last forever, and that the over-supply will come to market at some stage.
“These RGAs will eventually enter the market for compliance purposes, and when that happens, prices could drop precipitously unless non-compliance entities are able to gradually unwind their positions without attracting too much attention from other market participants,” it said.
By Stian Reklev – stian@carbon-pulse.com
Not yet signed up to CP Daily? Subscribe to our free newsletter here
