Weekly Commentary: ICE CCA prices weaken by over a dollar as fund managers increase short positions on the front

Price Commentary
Weekly Commentary: ICE CCA prices weaken by over a dollar as fund managers increase short positions on the front

WCI CaT

Monday, 23rd August 2021

Anant Jain

Last week at the InterContinental Exchange (ICE), a total of 31.5M tons of CCAs changed hands. The secondary market front dropped steadily after short positions increased consistently in the market. This comes in the auction week where the presence of financial entities is now more than ever.

A total of 4.6M tons of OI increased WoW*. The V21 Aug21 front received 2.2M tons of fresh OI. V21 Sep21 positions increased by 1.4M tons.

The compliance market participated in the 28^th Joint Auction on 17^th August 2021. We observed that financial participants held a bullish outlook in the secondary market that caused CCA prices to move up to $23 levels before the auction or at least up to 3^rd August. Since then, these entities have been reducing net long positions in the market, over the last three weeks. In the graph below, we see a drop in long positions reported on 3^rd August and 10^th August. In the most recent data, 17^th Aug or on auction day, these entities even increased their short positions by 0.87M tons. An indication that some fund managers are expecting lower settlement prices in the auction which would translate to lower front prices on the secondary market.

On the ICE market, we see an increase in OI on the CCA front on the days that the front closed in red (figure below). Both on Tuesday and Thursday, CCA prices lost between $0.20-$0.54 by the end of trade. OI position on the front however increased by over 0.5M tons on both days. OI on V21 Aug21 increased by 2.2M tons WoW*. Purchases on the Aug21 contract clearly have a close bearing with the auction settlement price that will be announced on 25^th Aug, days before the expiry of the Aug21 contract.

We expect the settlement price for this auction to be in the range of $20 to $20.50. And this secondary market could be well on its way to meet that. In the coming week, the CCA front will rest on the support of previously bullish fund managers who are now clear drivers in the secondary market.

*WoW Change reported between 12^th August and 19^th August.

Analyst Contact:

Anant Jain (anant.jain@californiacarbon.info)