European investment banks eye profits in French gas market

Author: Kelly Paul

2019/01/11

LONDON (ICIS)--European investment banks have stepped up their participation in France’s natural gas market, as greater volatility from carbon and coal open up speculative plays and the creation of Trading Region France (TRF) facilitates greater liquidity.

According to traders active in the French gas market, banks such as London-based Macquarie and France’s Societe Generale have either returned, or increased their exposure to the market over recent months.

One French gas trader told ICIS that banks could attain a ‘safe’ return of between 3% and 4% on a given trade. The banks are active on both over-the-counter and exchange venues and sources said interest was likely to be focused on prompt rather than curve contracts, which are less liquid.

Last November, following the merger of PEG Nord and TRS total volumes traded on the new PEG Day-ahead contract surged to 4.8TWh, up from 1.6TWh dealt on combined PEG Nord and TRS Day-ahead contracts the same month a year earlier, ICIS data show.

Financial entities increasing their exposure to natural gas markets marks a significant change in the way these markets are traded.

Investment banks beat a hasty retreat from trading commodities back in 2008 following the financial crisis. Proprietary trading desks at banks throughout Europe closed while financial authorities tightened up regulations.

Price volatility relating to movements in carbon and coal that has characterised European gas markets over recent months has enticed banks back into the French market. For TRF, their return signals the potential for greater liquidity.

Looking ahead, it is likely that more banks will turn their attention to trading French gas products and speculative plays will increase.

According to Societe Generale, Europe’s pivotal role in the rapidly developing global LNG market will increase the attractiveness of the region’s natural gas hubs to investment banks and hedge funds and fuel speculative trades.

The US is set to increase LNG exports to Europe where it is regasified and injected into national pipeline grids. Prior to the market’s merger, southern France in particular had been dependent on LNG imports given the region’s underdeveloped pipeline network.

LNG links Europe to the US and Asia as shippers seek profitable arbitrage opportunities and greater liquidity in LNG will spur more speculative trades.

“We see on the horizon an increasingly important rise in this type of behaviour in European gas markets,” Breanne Dougherty, head of natural gas research at Societe Generale told ICIS.