Analysis: Low premium capped PEG Sud curve trade ahead of merger

Activity on the curve at France’s PEG Sud hub was subdued in March, as a low premium to PEG Nord reduced the incentive to trade forward, according to market participants.

In the last month of the hub’s existence, before the switch to the TRS trading zone on 1 April, volume traded on contracts from the front month out reached only 1.27TWh, down 44% year on year, according to over-the-counter deal data collected by ICIS.

A weak TRS premium to PEG Nord since the hub’s launch could continue to suppress appetite for taking positions further out.

Auctions fail to spur activity

In March 2014, the first annual auctions for capacity at the north-south link, which connects the two largest French balancing zones, spurred traders to hedge their newly-bought transport rights on the market. But the same pattern did not play out this year following the auctions held in the first week of March, as traders appear content with a more hand-to-mouth strategy.

Much of the difference in traded volume was due to a lack of trade on the front two seasons. During March 2015, two deals were recorded on the front winter, eight on the Q3 product, and none on the front summer.

In the same month a year earlier, there were sixteen deals on the front two seasons, and even one transaction for two summers ahead.

“The market being low, maybe some players want to wait and see what happens in the future. They don’t want to buy one or two seasons ahead,” one trader said just before the merger.

“It looks like there’s a kind of cap for the spread of PEG Sud to PEG N around €1.00/MWh. They don’t have to have very large quantities in advance.”

Capacity price falls

The PEG Sud premium to PEG Nord collapsed in November 2014 as a shift in global LNG prices meant greater numbers of cargoes were sent to France. This trend has continued in 2015, and during March the PEG Sud April ’15 contract held an average premium of €0.40/MWh to the PEG Nord equivalent.

Reflecting the better availability of gas in PEG Sud, the price of firm annual north-south link capacity for Gas Year 2015/16 was much lower year on year, at 131.74€cent/kWh/h/year, around half what shippers paid for Gas Year+1 capacity in 2014.

“I think [the lack of forward trade is] mainly because there price for the auction was really low, and there’s lots of LNG expected in the south,” a second shipper active in France said.

Trade sources also said they doubted that the low levels of forward trade represented a hesitation to take positions ahead of the launch of the new trading zone, TRS. This was created on 1 April by combining PEG Sud with neighbouring PEG TIGF.

Trade at the merged marketplace has also been lacklustre in the first week of operation, with just one deal recorded outside the prompt, on the May ‘15 product. The TRS front month has so far held an average premium of just €0.372/MWh to the PEG Nord equivalent, suggesting that the low curve activity could persist. Emma Slawinski