Natural gas trading in Europe. Gas prices in Europe have shifted away from oil indexation, which also uses crude oil as a price indicator, and toward hub pricing, which uses demand and supply to price natural gas.
The European Union’s energy ministers have agreed to a gas price cap in an effort to reduce gas prices, which have increased energy costs and contributed to record-high inflation this year since Russia ceased delivering the majority of its gas to Europe.
Some market participants are concerned that the cap, which would be activated if prices on the front-month contract for the Dutch Title Transfer Facility (TTF) gas hub exceeded 180 euros per megawatt hour for three consecutive days, will force trading to the over-the-counter (OTC) market.
Furthermore, it may reduce liquidity on European exchanges and deter desperately needed liquefied gas exports from the United States and other countries to Europe.
The major trading hubs and how gas is traded in Europe are summarised below.
NATURAL GAS: WHERE DOES TRADE HAPPEN?
Trading takes place either over the counter or on exchanges. Exchanges provide transparency and make it easier for all market participants to participate. They are also subject to financial and also market regulations in order to prevent market abuse.
OIL INDEXATION VS. HUBSTATION
Gas prices in Europe have shifted away from oil indexation, and which uses crude oil as a price indicator, and toward hub pricing, which uses demand and supply to price natural gas.
According to a study released this month by Oxera Consulting, hub pricing will determine 77% of gas volumes in 2021. North-western Europe typically uses hub pricing, whereas oil indexation is more commonly used in Mediterranean gas trading.
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HUBS EXCHANGE
According to the current Oxford Institute for Energy Studies, there are approximately 30 gas trading hubs in Europe, though not all of them are particularly active. The National Balancing Point (NBP) in the United Kingdom and the Dutch Title Transfer Facility are regarded as the most mature, which means the most liquid and transparent.
Other active hubs include Austria’s Virtual Trading Point (VTP), Belgium’s Zeebrugge Beach (ZEE) and ZTP, Spain’s PVB, France’s Point Exchange Gaz (PEG), the Czech Republic’s VOB, and Italy’s Punto di Scambio Virtuale (PSV).
Germany established Trading Hub Europe (THE) last year by combining two pre-existing hubs in order to increase liquidity and streamline administration.
When Gaspool and NetConnect Germany (NCG) previously operated in separate regions, Germany was divided into two gas markets. They changed the name of their order books to THE in order to continue trading in futures and spots.
There are also plans to establish new gas trading hubs in Turkey, the Mediterranean, and Eastern Europe.
In 2019, the TTF accounted for 79% of all traded volumes in Europe. The TTF price is regarded as the benchmark for European gas prices, with LNG cargoes and other hubs comparing prices to it.
DERIVATIVES
There is no set price in gas hubs such as the TTF. There are various gas contracts available, some for immediate or near-immediate delivery (known as the spot or prompt market) and others for delivery hours, months, years, or seasons in the future.
Futures, forwards, options, and swaps are among the financial instruments used in the gas market. Futures contracts, which are contracts to buy or sell gas for main delivery at the TTF at a specific future time for a predetermined price, are traded on exchanges.
Forwards are contracts that call for the purchase or sale of TTF with a future delivery date, but they are usually customised, traded on OTC markets, and are not formally classified as derivatives contracts under EU equity trading regulations.
An option gives the holder the right, but not the obligation, to mainly buy or sell the underlying TTF futures contract at a specific price and date. Swaps are OTC contracts that allow two parties to trade payments based on market gas prices.
OVER-THE-COUNTER
Trading in gas derivatives can take place on both regulated exchanges and over-the-counter (OTC) markets. A network of brokers, buyers, and sellers who act as middlemen in the trading activity is typically included.
OTC trading can also take place bilaterally, in which case the counterparties are in close contact. Exchange trading, on the other hand, takes place on a single central order book where all buyers and sellers can communicate at the same time.
According to European Commission data, the percentage of exchange-executed trading on European gas hubs was around 62% this year.
The European Union’s energy ministers have agreed to a gas price cap in an effort to reduce gas prices, which have increased energy costs and contributed to record-high inflation this year since Russia ceased delivering the majority of its gas to Europe.
Some market participants are concerned that the cap, which would be activated if prices on the front-month contract for the Dutch Title Transfer Facility (TTF) gas hub exceeded 180 euros per megawatt hour for three consecutive days, will force trading to the over-the-counter (OTC) market.
Gas prices in Europe have shifted away from oil indexation, which also uses crude oil as a price indicator, and toward hub pricing, which uses demand and supply to price natural gas.
According to a study released this month by Oxera Consulting, hub pricing will determine 77% of gas volumes in 2021. North-western Europe typically uses hub pricing, whereas oil indexation is more commonly used in Mediterranean gas trading.
According to the Oxford Institute for Energy Studies, there are approximately 30 gas trading hubs in Europe, though not all of them are particularly active. The National Balancing Point (NBP) in the United Kingdom and the Dutch Title Transfer Facility are regarded as the most mature, which means the most liquid and transparent.
Other active hubs include Austria’s Virtual Trading Point (VTP), Belgium’s Zeebrugge Beach (ZEE) and ZTP, Spain’s PVB, France’s Point Exchange Gaz (PEG), the Czech Republic’s VOB, and Italy’s Punto di Scambio Virtuale (PSV).
Germany established Trading Hub Europe (THE) last year by combining two pre-existing hubs in order to increase liquidity and streamline administration.
When Gaspool and NetConnect Germany (NCG) previously operated in separate regions, Germany was divided into two gas markets. They changed the name of their order books to THE in order to continue trading in futures and spot.
There are also plans to establish new gas trading hubs in Turkey, the Mediterranean, and Eastern Europe.
In 2019, the TTF accounted for 79% of all traded volumes in Europe. The TTF price is regarded as the benchmark for European gas prices, with LNG cargoes and other hubs comparing prices to it.
There is no set price in gas hubs such as the TTF. There are various gas contracts available, some for immediate or near-immediate delivery (known as the spot or prompt market), and others for delivery hours, months, years, or seasons in the future.
Futures, forwards, options, and swaps are among the financial instruments used in the gas market. Futures contracts, which are contracts to buy or sell gas for delivery at the TTF at a specific future time for a predetermined price, are traded on exchanges.
Forwards are contracts that call for the purchase or sale of TTF with a future delivery date, but they are usually customised, traded on OTC markets, and are not formally classified as derivatives contracts under EU equity trading regulations. An option gives the holder the right, but not the obligation, to buy or sell the underlying TTF futures contract at a specific price and date.
Swaps are OTC contracts that allow two parties to trade payments based on market gas prices. Exchange trading, on the other hand, takes place on a single central order book where all buyers and sellers can communicate at the same time.
According to European Commission data, the percentage of exchange-executed trading on European gas hubs was around 62% this year.
Edited by Prakriti Arora
