A short 'call option' position has given major impetus to a recent rally in European CIF ARA thermal coal futures, which has seen the year-ahead Cal-17 contract price rise almost $5/mt in just under a week, trading sources said Tuesday.
A major counterparty was widely said to have written a call option for the Cal-17 with a strike price of $50/mt some months before, resulting in significant mark-to-market losses when Cal-17 began to edge above this level around June 1.
In a bid to limit its exposure, the counterparty in question had begun buying the Cal-17 contract, opting to execute deals through banks, according to several trading sources.
This accounted for the recent increase in trading at the back of the curve over the last couple of days, particularly from banks, one London-based trader said."It's impossible to know whether they are buying for their own books or buying for traders. I suspect it's the latter," he added.
The news -- coupled with a more bullish outlook in Asia, higher break-even production costs linked to rises in the Colombian peso and the Russian ruble against the dollar and sharp rallies in Brent crude futures, which had already provided some support to prices in recent weeks -- prompted a number of players in the wider market to shift their positions from short to long as the trend looked to be sustained.
This further increased buying momentum at the back of the curve which threatened to nudge the Cal-17 price above $55/mt for the first time since August 2015.
"Of the $13 rise [in the Cal-17 contract] over the last two months, I'd say around $5 is from a bubble created by this short options position," a European utility trader outlined.
At Tuesday's close, Platts assessed the Cal-17 at $53.85/mt, down 75 cents from its year-to-date high set Monday.
The support at the back of the curve had also filtered into near-by futures and lifted physical deals, subsequently flipping the market structure into contango toward the end of last week.
