Brokered Spanish PVB gas trade rockets on the curve

Robert Songer

15-Mar-2017

Brokered natural gas liquidity at the Spanish PVB hub has jumped so far in 2017, data from ICIS shows. This is despite a mandate for some volume to be executed on the MIBGAS bourse.

As was expected, following the launch of the new Spanish balancing regime in October 2016 liquidity on the prompt increased dramatically on the exchange.

Yet the bourse has not been the sole beneficiary of the new market design, as brokered volumes on both prompt and curve have jumped significantly too.

ICIS data shows that over-the-counter (OTC) prompt trade has risen almost 14-fold year on year to stand at 420GWh, in the period 1 January-10 March, although the start of the current quarter was a period of unusually high demand.

Extending the period back to when the new balancing regime was launched, it is still clear that prompt OTC trade has undergone a big surge in volume.

According to ICIS data, total trade since October on prompt products – principally within-day, day-ahead, weekend and balance-of-month (BOM) – stands at 1.34TWh, or almost six times greater than the 240GWh transacted between 1 October 2015 and mid-March 2016.

BOM’s longer delivery period means it accounts for half of this volume, but it is day-ahead and within-day that account for the bulk of the deals.

By comparison, MIBGAS prompt volume has reached 5TWh in the same five-and-a-half months.

Current trading activity therefore suggests a market in which most prompt deals are conducted on the exchange, increasingly including deals above and beyond those mandated for the bourse. OTC venues have attracted sporadic bursts of activity.

Curve activity

Beyond the prompt, liquidity development has been no less impressive, but here it is solely an OTC story.

So far this year, and with half a month until expiry, the front quarter has already traded nine times in 413GWh of volume, compared with five times totalling 387GWh in the run up to the start of the second quarter last year.

Eight deals in the front summer for some 870GWh of gas is a new phenomenon entirely, as no trades in Summer ’16 were reported to ICIS in the first quarter of 2016.

Activity during January, February and March in the Q3 ’17 product stands around 20% above third-quarter-delivery trade at this point last year. And volume in the front calendar year is more than three-fold higher, at 1.69TWh, compared with 0.54TWh in the same period a year ago.

Beyond the prompt it is only possible to compare OTC with the exchange on the front month, since no other curve products are offered on the bourse, but at this stage the bourse plays only a very small role. OTC front-month trade since the start of the year stands at 2.18TWh, while MIBGAS month-ahead trade amounts to 1.9GWh since the start of the year.

As a regulated offering, the bourse was launched with the aim of creating liquidity across the market, but it is hard to argue, on either bourse or OTC, that forcing balancing-operation trades should foster increased curve liquidity. Traders see little reason the new balancing regime rolled in October 2016 should boost curve activity directly, but seem to agree that the flourishing of trade we are now seeing probably stems from the installation of a more professional attitude towards trading. The increased liquidity seen during the first quarter of 2017, appears to be part of an organic process of growth that should be sustained, traders say.

Now that a major spike in demand in January and February this year has abated, it remains to be seen whether the recent surge in curve traded volume remains a fixture.

It could be that increased traded volume across products from the front quarter to the front calendar year are related to the hedging strategies of shippers with long-term import contracts that are seeking to mitigate some length in their portfolios, and will now thin out. However, traders active now in Spain are increasingly confident that this is more than a blip. robert.songer@icis.com

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