European gas hubs – how strong is price correlation?
While the succession of pro-competition measures (or ‘packages’) for gas at the EU level since the early 2000s certainly favoured the development of the continental trading hubs, their progress has faced headwinds from dominance on the supply-side by long-term contracts which, until recently, were almost exclusively priced in relation to oil products. However, in the 2008 to 2011 period, a surge of LNG supply to Europe, growing accessible pipeline connectivity, supplier choice for end-consumers and a protracted period in which hub prices were considerably below those of oil-indexed contract prices, together catalysed the development of liquidity at these hubs. Some upstream suppliers came to embrace this transition, others continue to resist; but in the downstream markets hub development has been generally assisted by co-operation between system operators and regulators.
Despite favourable outward signs of progress, in order to assess the degree to which the European traded hubs have matured to the point where they can be said to represent a reliable and representative ‘market price’ requires extensive data and quantitative analysis. In this context Beatrice Petrovich’s paper is a truly landmark work. What sets it aside from previous research is that it incorporates OTC (Over the Counter) market data. Through access to data from brokers (The Tankard Parties: ICAP Energy Limited, Marex Spectron Group and Tullett Prebon Group Limited) who in aggregate represent some 80% to 90% of the European gas OTC market, Beatrice’s analysis was able to incorporate anonymised price and volume data on every trade on every European hub considered since January 2007.
The degree of price correlation between hubs demonstrated by this analysis provides compelling support for the hypothesis that the European hubs do provide a reliable price reference. Where anomalies occur they can be related either to hub immaturity in early periods or to physical connectivity constraints.