Analysis: Groningen cap boosts TTF Q2/Q3 arbitrage liquidity in February

The Dutch government’s 9 February decision to cap natural gas production from the giant Groningen field has increased the volatility of the TTF Q2/Q3 2015 price spread.

This has also boosted market liquidity on the arbitrage between the two contracts, ICIS trade data shows.

Following the news that Dutch gas production would be capped at 15.5 billion cubic metres until July, strong gains on the Q2 ‘15 contract dragged the spread wider. One TTF trader explained that near-term delivery months, particularly April ’15, had been more bullish on the news than the front Summer contract had been, which resulted in the wider Q2/Q3 spread.

According to ICIS closing assessments, the premium held by the TTF Q2 2015 delivery contract to its Q3 2015 peer widened to €0.65/MWh by the end of February, up from €0.30/MWh on 9 February. The price spread was assessed at a high of €0.70/MWh on 26 February.

Volatility on the spread between the front two TTF quarters has boosted market liquidity on the Q2/Q3 arbitrage. In February, a total of 394 Q2/Q3 ’15 spread trades were reported to ICIS, up from 149 trades in January. Of the total Q2/Q3 ‘15 spread trades in February, 303 were dealt after 9 February.

Shippers active at the TTF can turn a profit by trading the arbitrage between two quarterly contracts as the spread between them varies. This could be done by selling Q2 2015 and simultaneously buying Q3 2015 when the Q2 premium is particularly strong, and then simultaneously executing the reverse transactions at a later date when the premium has shrunk.

In this way, a trader’s profit will equal the difference between the two spread trades concluded, but they will maintain the same physical delivery profile across Q2 and Q3.

Fundamental changes

On 9 February, combined Dutch natural gas production was 252 million cubic metres (mcm)/day and on 2 March it reached 206mcm/day, representing an 18% drop.

In the same period of 2014, total Dutch production had dropped 5% to 243mcm/day.

With less domestically produced gas available, cross-border flows to Belgium, Germany and Britain have all fallen. Combined Dutch exports on 2 March totalled 151mcm/day representing an 18% drop from 9 February.

Norwegian deliveries to the Netherlands via the Emden interconnection points have increased 31% to 50mcm/day in the same time, partly offsetting the Dutch production drop. The Netherlands has also been supplied with 6mcm/day of regasified LNG through February 2015, compared with less than 1mcm/day in the same month of 2014. Jake Horslen