European Gas Prices Disconnect from Power Markets in November

European natural gas forward prices disconnected from European power prices in November, but retained their close correlation with the oil market, data shows.

This weak gas-power price correlation is likely due to the impact of regulated electricity buying in the French power market under the country’s ARENH mechanism.

France’s alternative electricity suppliers had until 21 November to notify energy regulator CRE about the quantity of capacity they wanted to secure from incumbent EDF for delivery in 2018.

As this electricity is marketed at a fixed, regulated price, it exerted a strong influence on the French Year+1 contract, which filtered through to associated power markets, including the benchmark German Year+1 contract.

The ARENH tariff capped the French Year+1 price at around €42/MWh for most of November (click here for story).

However, the impact of ARENH on the gas market was muted, with the TTF and other European gas prices instead taking direction from shorter-term fundamentals, such as spiralling demand due to seasonal change and below-average temperatures. Unplanned outages at Norwegian gas supply assets were another price driver of the spot market, which had a knock-on effect on dragging up forward contracts.

In contrast to power, longer-dated European gas contracts remained closely correlated to oil futures in November. Due to the prevalence of oil-indexation in some long-term gas supply contracts, oil can act as a key driver of the gas curve.

Outlook

Looking ahead, European gas and power prices will likely show a close correlation over the winter, as the two commodities are closely intertwined due to gas’ role in the electricity generation mix. Both commodities are also often driven by similar fundamental weather-drivers.