European gas hubs price correlation – barriers to convergence

With survey data from the IGU and others continuing to demonstrate the continuing widespread adoption of hub pricing for European gas, and trading volumes growing strongly overall, this paper revisits the issue of hub price correlation.  Following from her ground-breaking paper of October 2013 where for the first time in the public domain the analysis of OTC trading data revealed strong trends towards price convergence at the European gas trading hubs, Beatrice Petrovich in this paper extends the analysis with data to October 2013.

Focussing on price and volatility correlations between Europe’s gas trading hubs, Beatrice identifies those whose trends, either temporarily or on a more sustained basis, are out of line with the ‘core group’ of North West continental hubs.  Applying a forensic focus, the underlying causes of such anomalies are, where possible, identified.  This involved extensive discussions with system operators, market participants and analysis of infrastructure flow data.

The emerging picture is a positive one in terms of supporting the thesis that European gas hub prices respond to supply and demand forces.  However as flow patterns across the European geography change, for example due to LNG being diverted away from Europe towards Asia and with the opening of North Stream, new ‘pinch points’ or bottlenecks emerge which can cause hub prices to de-link.  Whether, in a European context, the appropriate incentives are in place to resolve such bottlenecks in a cost effective manner is beyond the scope of this paper.  It may be worth reflecting however that despite being a liberalised gas market since the 1980s, the US still has need to reconfigure and debottleneck its gas transmission system as its geographic loci of demand and supply continue to change and evolve.

Executive Summary

By: Beatrice Petrovich

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