CME offset futures open interest hits record on fund buy-in

5 Dec 2022

Quantum Commodity Intelligence - The number of contracts open in CME Group's carbon offset futures has hit a fresh record after a US fund bought large chunks of the Global Emissions Offset (GEO), according to market sources on Monday.

Open interest in both the GEO and the Nature-based Global Emissions Offset (N-GEO) hit 28.1 million mt on Friday, up 31% in the past month.

While volumes have risen slightly in the N-GEO, they are up nearly 80% in the GEO, which reflects Corsia-eligible offsets, to 13 million mt.

The increase has largely occurred in the past week as sources said "a large US fund" entered the contract to seek yield, which is the process of profiting from differences in the value of different contract maturities.

"It's the GEO Dec23/Dec24 spread. Someone has been locking in that carry around -0.40 for 1000s of lots," said one broker.

"Last week's voluntary carbon market was sparked by a two-million-ton spread trade of CBL GEO futures on CME Group's NYMEX exchange. On Wednesday, a trader went long 2,000 Dec23 contracts at $3.25 and sold 2,000 Dec24 contracts for $3.69," said exchange Xpansiv in its weekly update.

Traders have largely focused their attention on the N-GEO, rather than the GEO, in recent months due to buyers' preference for nature-based credits.

But with this latest development, the N-GEO's lead over GEO in terms of open interest has fallen to 2.2 million mt, or 17%, its lowest since 2021.

The price difference between different GEO future contract maturities has been largely stable, unlike the N-GEO, which makes it more susceptible to such trades, sources also said.

In October, the UN's International Civil Aviation Organization (ICAO) decided to slash the baseline of its Corsia scheme and adopt a long-term 'aspirational' goal of 2050 net-zero emissions.

Traders said at the time the decision could help boost the demand for carbon credits, although it appears to have had an impact on markets volumes rather than prices, which have been falling.