Euro slump helps drive British NBP volatility, price impact muted

A slump in the value of the euro has helped drive volatility in the British gas market, but its impact on pricing has been largely offset by fundamental drivers.

A falling euro can often be bearish for British NBP prices, particularly on the far curve, as demand tends to fall from traders with euros to spend

One euro was equal to £0.74 on Friday, having fallen from £0.79 since 6 January.

The currency lost value throughout the past year, from £0.83 at the start of January 2014, amid weak growth in the trading block and in anticipation of the start of quantitative easing by the European Central Bank.

This decline accelerated in 2015 when the measures were confirmed and after an election in Greece raised the prospect of its exit from the single currency.

“All things being equal this should be net bearish for the NBP,” said one internal analyst at a commodities trading firm who did not wish to be named, explaining that its linkage to neighbouring markets would mean that any arbitrage caused by a shift in currency would be quickly closed out.

“It’s generally perceived as a bearish driver for the NBP but it is also supportive of TTF prices because it means an increase in the price of oil-indexed contracts due to its link to the price of the dollar,” said Trevor Sikorski, analyst at consultancy Energy Aspects.

The NBP and neighbouring Dutch hub are both key venues for those trading the forward markets. Many can opt between the two hubs and could easily sell a forward position in the more expensive currency and buy in the cheaper currency for an equivalent contract.

“A shift in currency doesn’t have an impact for more than a few minutes,” said one trader active on the British gas market. “Some traders do both NBP and continental, so they reroute but it really depends also on which assets they hold.”

He added that a climbing pound against the euro in an already bearish market could exacerbate a downwards move as traders take it as a signal to sell.

However this largely relates to the trading of forward contracts far ahead of expiry for quick gains and does little to direct the flow of gas between Britain and the continent which is largely driven by supply and demand fundamentals.

“The exchange rate moves themselves might be too mild to justify a complete renomination,” the trader said.

According to another trader in the British gas market, those with a focus on trading the basis between the NBP and Belgian Zeebrugge hubs are often most attentive to shifts in currencies but this was rarely the driver of gas flows.

However the recent volatility in the currency, due to the ongoing wrangling between European authorities and the Greek government is feeding through into the gas market.

“Currency isn’t the major driver in the gas market but with the euro/pound spread ranging around the €0.02-€0.03 mark on some days this adds a bit of volatility, which is good for trading,” said another trader at a utility.

“This also gets the spreads going which is another good driver of volatility.”

Power profit margins for gas generation are often locked in using a clean-spark spread trade. A component of the carbon contract for the European emissions trading scheme is euro denominated. Albert Evans