Volatility and volumes soar at European hubs in late April

A hectic fortnight across Europe’s natural gas markets saw volatility on key contracts jump as many as 36 percentage points in just eight trading sessions and gave an unexpected boost to traded volumes at the start of the summer.

Between 18-26 April the price of key curve contracts at Europe’s most liquid hubs posted their biggest weekly gains since September 2014, as a number of factors came together at once.

Over-the-counter traded volumes at the NBP and TTF rose 6% month on month and 39% year on year to a combined 2,051TWh total.

Oil

The trigger, if not the leading cause of the spike, was unexpected strength in the oil market from 18 April.

Crude prices gained value in the weeks leading up to a 17 April meeting between global oil producers, on the risk that an agreement to reduce output may be reached. However, even when global producers failed to reach such an agreement, the price of oil futures continued to rise, sparking a short squeeze on the European gas curve.

“Stop-loss orders are being triggered all over the market,” one trader said at the time.

The price of oil retains a physical link to forward gas contracts at the TTF in particular, where contracts are traded to hedge and optimise the offtake of gas tied to long-term oil-linked supply contracts. In addition, oil’s efficacy as a sentimental driver has been particularly strong in recent months as the commodity has slumped to, and rebounded from, 12-year lows earlier in 2016.

Weather

As well as having to grapple with a rising oil price, traders were also faced with the threat of an unexpected drop in temperatures on 18 April.

The five-day outlook published by WSI grew progressively severe throughout the week, with temperatures as much as 6°C below the norm forecast by Friday 22 April.

Between 18-27 April, weather-driven demand for Dutch gas surged to 149 million cubic metres (mcm)/day, representing 126% of the three-year average for the month of April, with a similar spike in consumption in Britain and elsewhere.

Historic Lows

In the first week of April, European gas prices fell sharply to new historic lows, which some market sources believe played into the rebound that followed.

On 7 April, the TTF May ‘16 contract hit €11.113/MWh, representing the lowest price for the Dutch front-month contract since 19 March 2010. Other contracts further out on the curve fell to lows not seen since the end of the last decade.

“We hit lows not seen since 2009, so I guess many guys had this in mind and we have seen a move of panic, as everyone has cut their short positions at the same time,” a trader said.

Outlook

European prices finally corrected down on 28 April, but some traders expect further volatility through the summer, with gas fundamentals still indisputably bearish but with traders now more reluctant to sell so aggressively in the wake of such a sharp price hike.

“We will be in a range, with some spikes like this week, at least until the LNG arrival,” one of the traders predicted, with reference to looming LNG oversupply as Australian and US liquefaction capacity continues to ramp up. “The hardest situation would be another oil rally, with bearish fundamentals on gas, because this will make decisions difficult for traders and make them nervous like they have been this week.” jake.horslen@icis.com