Gap widens between NCG and TTF natural gas Day-ahead volumes
Day-ahead volumes traded on the over-the-counter (OTC) market at Germany's NCG natural gas hub have continued to lose momentum against similar trades on its neighbouring Dutch market, TTF, this summer, according to ICIS data (see graph).
Last month, NCG Day-ahead volumes equalled some 55.8% of the Day-ahead volume dealt in the Netherlands, down from an average of 92.5% in the same month last year. Since August 2011, when NCG Day-ahead transactions temporarily exceeded those traded at the TTF, ther German hub's volumes have increasingly lagged behind those of the Dutch hub.
In absolute terms, Day-ahead volumes at the TTF saw a 65% increase year on year in July, while NCG volumes were at the same level as in July last year. A total of 20.3TWh in Day-ahead OTC transactions was traded at the TTF, while the NCG registered 11.4TWh.
In contrast with previous months, July's widening gap between traded Day-ahead volumes at the two hubs is not reflected in an increasing German price premium.
When NCG Day-ahead is noticeably more expensive than its TTF equivalent, the price difference provides arbitrage opportunities for the Dutch market to ship gas to Germany. Most gas in Germany is purchased for physical delivery and is normally bought and sold within the country; however, when German suppliers see cheaper gas in the Netherlands, they tend to buy it there and flow it across the border.
As a result, there is less volume traded at the German hub as trading activity shifts from the NCG towards the TTF as a result of a widening spread between the two hubs' Day-ahead contracts.
Such was the case early this year, when, in February, the German premium averaged €0.43/MWh, peaking at €2.475/MWh, acting as a strong incentive for arbitrage deals.
In contrast, the premium dropped to an average of just €0.11/MWh in July.
Lower storage injections
Meanwhile, Day-ahead contracts at both the NCG and TTF have been trading at unusually strong levels for a summer season, preventing traders from buying gas for storage injection.
The front winter's premium over Day-ahead at the NCG averaged €4.75/MWh at this point last year, but the equivalent figure now stands at €2.72/MWh, significantly lower than the €4.00/MWh mark at which storage capacity is generally considered viable for summer-winter arbitrage.
As Germany has about 10 times the storage capacity of the Netherlands, the current spreads are particularly causing a decrease in German traded volumes and at least partly explain the widening gap in traded volumes.
However, while some market participants expect TTF Day-ahead volumes to stay ahead of the NCG's, others believe that the German market's advancing liberalisation will eventually cause its volumes to catch up with the TTF once again.
One key factor influencing liquidity at the NCG is the conversion fee charged between high-calorific gas (H-gas) and low-calorific gas (L-gas). Early this year, German regulator the Federal Network Agency (BNetzA) decided that the German hubs must phase out their conversion fees by September 2016 (see ESGM 29 March 2012).
At the TTF, this has already happened, with conversion costs being socialised since July 2009. The costs are borne by the grid operator but, in the end, all participants pay the costs though their grid fees.
For Germany, BNetzA has set each hub a maximum yearly fee from September until September 2016, at which point the conversion fee will drop to zero. The current NCG fee of €0.90/MWh - which traders say they still consider much too expensive - already matches the maximum level prescribed by the regulator for September 2014, so a positive impact on traded volumes from the phase-out is unlikely before that date. JR
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