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German L-gas/H-gas spread narrows as natural gas demand drops

17 May 2012 16:23:33 | esgm

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The price spread between low-calorific and high-calorific natural gas (L-gas and H-gas respectively) at the German hubs has narrowed significantly since the beginning of the summer season, a poll by ICIS has revealed.

According to market participants, the over-the-counter price for L-gas contracts at the NCG hub is currently about flat to the equivalent H-gas products. Sources previously estimated an L-gas winter premium of €0.50−1.00/MWh (see ESGM 17 February 2012).

The main reason for the narrowing spread is the drop in demand during the summer season.

"The L-gas market is extremely volatile. At times of high demand, gas can get extremely expensive, and in the summer, you might have to even sell it at a discount to H-gas at times," one trader said.

Sources agreed that the reduction of the NCG's gas-quality conversion fee to €0.90/MWh from €1.50/MWh from 1 April (see ESGM 15 February 2012) has not been at the root of the currently tight spread.

"We won't see an effect from the lower fee until later in the year, when it gets colder and L-gas demand goes up again," once source pointed out.

Last year, the NCG L-gas premium went up to well over €1/MWh on days of high demand, sources have said. But because of the reduced conversion fee, these peaks are unlikely to happen next season. Traders expect the reduced fee to narrow the spread between H-gas and L-gas products and lead to higher conversion rates in the NCG market zone starting from September this year. If the NCG L-gas premium exceeds the €0.90/MWh mark at times of high demand, market participants will start buying H-gas instead and using the conversion service.

At Germany's less liquid GASPOOL hub, there is a similar situation. While the L-gas premium was estimated at about €1/MWh during the winter, sources now estimate it at about €0.20-0.30/MWh.

"But it also varies strongly. I've recently had to sell GASPOOL L-gas at a discount to H-gas because demand was so low," a trader pointed out.

According to participants, there are usually no offers for GASPOOL L-gas products on brokers' screens, and the majority of deals are done bilaterally.

The GASPOOL hub operator has also recently lowered its conversion fee to €1.95/MWh from €2.20/MWh, but it still stands significantly above the average L-gas winter premium (see ESGM 16 February 2012), giving no incentive for traders to use the conversion service as of September.

While market participants expect rising conversion rates for the NCG market area, most agreed that an increase at the GASPOOL hub is unlikely, and times of strong demand will continue to see high L-gas prices. JR

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