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Numerous factors make gas prices volatile, which presents many opportunities for current and coming traders.
By
Alexander Kristensen
For most of Time2Market’s clients, trading is about opportunity. It is about considering all factors and choosing the most optimal path forward.
With the recent increase in interest toward entering gas trading and expanding gas trading portfolios, we have investigated the underlying motivator: increased volatility and the factors that affect it.
Volatility is the degree of variation of the price of a specific commodity over a specific interval of time. The higher the variation around the average price level, the higher the volatility. In other words, volatility measures the price uncertainty in commodity markets. In gas markets, volatility is given in EUR/MWh (or p/th).
Increased volatility means increased opportunity for profitable high-risk trades. To ensure success in such higher-risk trades, traders need a dynamic strategy that can easily adapt in reaction to market changes.
In order to be able to predict market behavior and adapt their activities, traders monitor several factors:
Typically, trading houses use different external sources for predicting and forecasting LNG shipping and general flow movements around the European and Global markets. The forecasts calculated could indicate the market movement on the Intra-day, Day-ahead, and Front-month markets.
A market operator is responsible for balancing the supply and consumption of gas on a national level, which means that, although EU-wide regulations are set in place, balancing rules and market operator behavior is individual and highly dependent on local regimes and guidelines.
To support its main function as a balancing authority, each market operator has a store of natural gas to ensure demand can be met in the case of limited supply. However, how market operators manage the balance of their grid is more complex.
Some market operators, for example, in France, Italy, Austria, the UK, Denmark, etc., publish a linepack, which allows traders to follow the country’s position on an hourly basis.
Other markets, however, announce or actively start to balance the local gas market to meet the demand or supply at completely irregular intervals. These balancing actions can require an even more robust and flexible trading strategy to mitigate risk.
Gas balancing rules (BAL NC) ensure that flow and withdrawal into a transmission network are managed efficiently by all Balance Responsible Parties (BRPs). Aligned balancing rules ensure that individual imbalances caused by parties whose flows to and withdrawals from a grid are not equivalent do not have a big effect on the system.
Balancing rules also differentiate from operator to operator. Some rules are very strict and require traders and trading houses to be cautious with their position. Traders and trading houses have a monitor system to keep an overview of their positions across markets and ensure that they fulfill their responsibilities as a Balance Responsible Party.
Depending on the collection of gas markets in a participant’s portfolio, balancing rules can have a very big influence on their trading strategy.
Wholesale gas prices have historically been higher during the winter months due to increased demand from the end consumers and lowered production caused by unfavorable weather conditions. As there is less flexibility in adapting to end consumers’ demand, many market operators must use their storage reserves, which, over time, limits an operator’s ability to react to changes in demand. This inability to match demand further increases the volatility of gas prices.
Weather conditions greatly affect the short-term demand for gas, which increases its price. Weather changes can influence supply and distribution capacities due to unexpected conditions. Prolonged and severe changes in weather can cause strong fluctuations in the amount of natural gas consumed by end users. For example, we saw the forecasted Dutch and British wholesale gas prices for February and March drop by 1,8% after the weather forecast for the second half of January was published on January 10th.
News, political or otherwise, can have a huge effect on gas prices. Everything from new regulations in the industry to global political dynamics can affect the market.
Geopolitical conflicts can disrupt supply and demand, as well as production and shipping, thus impacting volatility and, therefore, trading strategies.
Environmental policies on climate goals, political decisions on the development of pipeline projects, as well as the imposing of sanctions and embargoes can offset trading balances worldwide.
The Dutch Title Transfer Facility (TTF) is usually referred to as the most used European gas price benchmark, due to its role as a reference in contracts all over Europe. The Front-month prices of TTF can therefore often influence the Intra-day and day-ahead prices all over Europe.
Constraints along the pipeline delivery system can impact supply and distribution capabilities to and from the affected markets, which then influences all neighboring markets that shippers are redirecting flow from in order to balance the affected grid. This snowball effect can continue until the need for maintenance on the pipeline is resolved.
Pipeline outages are announced on different external sources, the most common and used is Reuters. These outages affect the price movements almost instantly on the TTF front-month, causing price movements on the Intra-day and Day-ahead markets.
While the power and gas markets are highly correlated and often affected by similar factors, gas trading is set up in a unique way.
Understanding the intricacies of flow options and optimizations in terms of controlling your daily position is a key aspect of maximizing your success in gas trading.
The factors affecting your success are directly influenced by which markets you operate in and whether you trade cross-border, cross-commodity, short-term, or long-term.
Considering all factors when entering a new gas market can be complex and time-consuming. Time2Market supports you in the research, estimations, and drafting of your business plans. By outsourcing the market entry and market continuity, you ensure that you not only have the resources to continue your current daily operations at the same capacity but that you are live and ready to trade on your desired market faster.
Book a meeting with Alexander and discover how Time2Market can help your business reach the next level.
We deliver. You excel.
Disclaimer: Time2Market ApS is not responsible for the completeness, accuracy, and actuality of the information provided. This article is intended for informational purposes only and should not be considered business or legal advice.
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