The record high 112TWh traded over-the-counter in March 2017 pushed the Italian natural gas PSV hub to outstrip the German GASPOOL as the fourth most liquid in European hub after the British NBP, Dutch TTF and German NCG.
Traders expect the PSV to cement its position in the coming months, when liquidity at the Italian hub could be supported by injection-related demand and hedging activity sparked by uncertainties on the power side related to low hydro reserves.
Italy hydro reserves were just 32.7% full on I February, 11 percentage points lower year on year and well below recent years, data from system operator Terna shows. A decrease in hydropower output is typically offset through more thermal power generation, the majority of which comes from gas-fired power plants. Gas-fired generation is Italy’s largest source of power production, after hydropower.
In March, expectations of potentially strong gas demand from power producers in summer prompted gas traders to cover their positions before the end of the gas winter, which was among the drivers of liquidity on the curve. As traders already started injecting some risk premium related to low hydropower on the power near curve in March, relatively high spark spreads, which measure the profitability of gas-fired power plants, also spurred cross-commodity hedging activity, with traders selling gas and buying power for the same delivery period.
Storage-related hedging activity was also a major driver for liquidity on the curve. The success of storage auctions held in March by Italian storage operators Stogit and Edison Stoccaggio for seasonal and monthly storage capacity led traders to hedge seasonal gas contracts, buying gas to inject in summer and selling gas to withdraw in winter. A total of 10 billion cubic metres of available seasonal capacity was assigned by Stogit in auctions in March.
According to traders, strong injections could further foster liquidity during summer months. In Italy, injections and withdrawals are regulated by seasonal caps for security of supply reasons. In the injection period, which runs April-October, if shippers fail to fill the capacity they booked to a certain percentage they incur financial penalties.
Uncertainties around gas demand from power producers are also expected to foster liquidity on the gas near curve, as shippers could decide to buy gas volumes on the PSV in anticipation of higher gas-fired production in the third quarter, which will depend on weather and rainfall. One utility-based analyst said he expects these cross-commodity dynamics to further spur liquidity on the “People are buying power for Q3 ’17 and selling gas, holding a long position on the spark spreads. Depending on what happens to the spark, we might see the contrary happening,” the analyst said. email@example.com