• 4 minutes China - EU: Xi Says Cooperation Is Mainstream In Their Ties
  • 8 minutes The Mining Industry Has Had It Easy For Far Too Long
  • 11 minutes Lawsuit-Happy Councilor Wants to Take Big Oil to Court
  • 15 minutes U.S. Shale Output may Start Dropping Next Year
  • 1 hour Dutch Populists Shock the EU with Election Victory
  • 1 hour Trump to Make Allies Pay More to Host US Bases
  • 17 hours Venezuela Says Russian Troops Land to Service Military Equipment
  • 7 hours Multi-well Pad Drilling Cost Question
  • 17 mins Public Companies that attended OPEC "THREAT DINNER" at CERRAWEEK must disclose any risks in their SEC Financial filings.
  • 2 hours 3 Pipes: EPIC 900K, CACTUS II 670K, GREY OAKS 800K
  • 17 hours U.S.-China Trade War Poses Biggest Risk To Global Stability
  • 23 mins England Running Out of Water?
  • 22 hours Read: OPEC THREATENED TO KILL US SHALE
  • 1 day One Last Warning For The U.S. Shale Patch
  • 2 days Climate change's fingerprints are on U.S. Midwest floods
  • 1 day European Parliament demands Nord-Stream-ii pipeline to be Stopped
  • 2 days Modular Nuclear Reactors
Alt Text

Oil Price Rally Hits Resistance

Oil prices are holding their…

David Woroniuk

David Woroniuk

David Woroniuk is a Doctoral Researcher in Energy Economics at Durham University, UK. His research interests lie at the intersection of Energy Economics and Computer…

More Info

Trending Discussions

The Bullish Case For Gas In Europe

European natural gas pricing is amongst the highest seen in recent years, as unseasonably high demand and the long-term ramifications of the pan-European cold snap are priced into the European market.

Whilst analysts and traders alike anticipate a strong demand ahead of the coming heating season (Bloomberg), this article is primarily concerned with the overall tightness of the European natural gas market.

In contrast to previous years, the Day Ahead price across European hubs has remained strong throughout the summer months, largely due to the previous uncharacteristically cold winter. The past European heating season was amongst the coldest in recent history, with European domestic gas demand responding accordingly, draining natural gas storage facilities throughout Europe. When temperatures eventually recovered, natural gas demand remained robust throughout Europe in order to replenish the storage which had been depleted throughout the cold weather, providing an unseasonably bullish sentiment across the European market.

Following this, a pan-European heatwave exacerbated demand throughout July and August, although European LNG still traded at a substantial discount to Asian LNG pricing. The determination of wholesale market prices of natural gas within Europe has historically been driven by two factors; European LNG imports and flexible oil-indexed pipeline gas from Russia and Norway above take or pay levels. Whether LNG imports or Russian gas acts as a price setter within Europe is typically dependent on Asian hub prices. As a rule of thumb, as Asian and European hub pricing diverges, LNG cargoes are drawn away from Europe by arbitrageurs, leaving Russian and Norwegian pipeline gas, indexed to oil or oil products, to act as the price setter. Conversely, weakness in Asian hub pricing pushes LNG cargoes into Europe, displacing pipeline gas as the price setter for marginal supplies in Europe.

Therefore, as Asia has presented a lucrative arbitrage opportunity over the previous months due to Chinese LNG demand, European natural gas markets have been uncharacteristically tight in comparison to previous cooling seasons, with a market expectation of tightness leading into the coming European heating season. Related: Can The U.S. Bring Iranian Oil Exports To Zero?

In order to dynamically assess the tightness of the European natural gas market, this article observes the harmonisation of price returns within the European natural gas market. This is made possible through generation of a connection density term based on price returns of 12 European Day Ahead hubs. From this, a rolling window estimator is applied, assessing the degree of price harmonisation, and therefore the tightness of the European market, at each point in time.

(Click to enlarge)

Figure 1: A Connection Density time series of European daily day ahead prices.

As shown in Figure 1, the connection density term increases substantially throughout the heatwave, driven by a perfect demand storm within Europe. A number of concomitant factors such as Asian LNG demand, uncharacteristically warm temperatures, and pressure on power generators to reduce coal usage, have firmed day ahead gas prices, increasing competition, harmonising prices, and ultimately tightening the European gas market. Related: India’s Thirst For Oil Is Outpacing China

The increasing tightness within the European market has the secondary effect of dampening price volatility, as displayed by the 30-day average volatility metric (Figure 1), which visually holds a negative correlation with the connection density term. This negative relationship can be expected to hold within the tight market conditions anticipated into the European heating season.

(Click to enlarge)

Figure 2: Causality amongst European gas prices at the highest (upper image) connection density (20/07/2018) and lowest (lower image) connection density (03/07/2018).

As Figure 2 shows, there is a substantial range in price harmonisation within the European natural gas market across the sample, with higher marginal prices often leading to increased competition in the pan-European day ahead market.

Fundamentally, the extreme weather experienced across Europe throughout the year has driven natural gas prices, and the tightness of the market, to multi-year highs. According to traders and analysts, the bullish price sentiment shall continue into the coming heating season, increasing competition within the European market, ultimately driving the market toward the EU objective of ‘one market’ for natural gas within Europe.

By David Woroniuk for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News