TTF, the Dutch natural gas trading hub, has seen an extremely busy second half of 2019. The market was highly volatile as it was impacted both by movements in global energy markets and by natural gas related news. During September, nearby contracts moved by up to 20% day-on-day, leading to record levels of volatility. Since our last TTF update, fundamentals are broadly unchanged: local production is shrinking, LNG imports are plentiful, and market liquidity is increasing. TTF plays a pivotal role in the nascent globally connected natural gas landscape.
Source: Bloomberg, CME Group
The Dutch government regulates production of the ageing Groningen field, which accounts for about half of the natural gas production in the Netherlands. The market was surprised when authorities announced that the complete production stop at the field would be brought forward by 8 years, to 2022. Lower production caps for the next gas year also led to a bullish price reaction. Natural gas markets were further impacted by a decision of the European Court of Justice to restrict Gazprom’s access to the OPAL pipeline in Germany. The perfect storm was complete when EDF, which dominates nuclear generation in France, announced that some of its reactors may contain substandard components. Due to coal’s diminishing role in the European energy mix, any news impacting power supply or demand have an increasing effect on natural gas prices.
The upwards price movement on TTF was strong, especially at the front-end of the curve. However, the prompt price quickly dropped back to earlier levels as the fundamental picture indicates a comfortable supply situation. There is a global LNG surplus and storage sites in Europe are near capacity. The start to the winter heating season was mild, leading to a period of sustained low prompt prices during October and November.
Increased liquidity in TTF allows traders to manage their positions more effectively in the light of decreased oil indexation and an increased global linkage of regional natural gas markets. Europe attracts LNG cargoes to keep the LNG market in balance when Asian prices are weak, as happened earlier this year. Essentially, TTF serves as the main price marker for the European region, while JKM is used to hedge Asian LNG price risk. The markets are connected as they compete for LNG imports, who increasingly originate from the U.S. Gulf Coast. For both JKM and TTF, CME Group is seeing an increased number of participants and a significant uptick in trading activity.
Source: CME Group
*November 2019 data up to and including Nov 21
TTF is further cementing its important role in globally connected natural gas markets. The market is quick to react to news, and TTF price signals have a growing influence on power markets (and vice-versa) given the increased role of natural gas in power generation. CME Group’s NYMEX exchange recently launched option contracts on TTF and NBP (the UK equivalent of TTF), complementing JKM options launched earlier in 2019. The NYMEX global natural gas product suite now includes futures and options on all key traded benchmarks, in addition to the recently launched first physically delivered Gulf Coast LNG futures contract.
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