In the past few years, the Netherland’s Title Transfer Facility (TTF) overtook the UK’s National Balancing Point (NBP) to become the premier gas trading hub in Europe. TTF has gained favor over NBP largely due to its location closer to more markets, supply pipelines, plentiful storage, and also the Netherlands’ Gate LNG import terminal, which has become paramount given Europe’s growing need for imported gas. As imports have grown, so has TTF in terms of its volume and its liquidity — a trend that is expected to continue as the European gas market evolves. TTF now shares the stage with Henry Hub and the Japan Korea Marker (JKM) as one of the key global benchmarks for LNG and natural gas. Though traders use TTF as a price index for LNG, much like its cross-Atlantic peer, Henry Hub, TTF is also heavily influenced by regional pipeline gas and storage levels. Today, we’ll look at the history of Europe’s premier natural gas index and the fundamentals affecting it.
RBN is pleased to announce that today’s blog was prompted by one of the winning submissions in our first-ever blog writing competition held for students in Texas A&M’s Trading Risk & Investment Program (TRIP). For more about the contest and links to other top entries, click here.
LNG exports have fast become a major influence on U.S. natural gas market dynamics, and likewise, the global market is increasingly impacted by LNG exported from the U.S. As we’ve discussed often in the RBN blogosphere, including An LNG Market for All Seasons, the top two destination markets are consistently Europe and Asia. But while spot Asian LNG has increasingly been priced based on JKM, the price marker used for indexing LNG deliveries to Europe has recently been in flux.
Up until 15 years ago, the majority of European natural gas was indexed off of crude oil, often with multi-year arrangements. Using crude as an index provided the price certainty needed to attract buyers and sellers as market participants could tap into the advantages offered by a robust and well-documented crude futures market. But as the European gas market has evolved, it has been able to wean itself off oil indexing. In 2005, over 90% of European gas imports were indexed to oil. This figure declined to 60% by 2012, 40% by 2015, and to only 25% by 2019, according to data from the International Energy Agency (IEA). The ability of natural gas to trade independently from oil is a sign that the European gas market has matured and developed the mechanisms to allow for active trading and price discovery.
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