European gas prices rise on abnormal weather

Ole Hansen

Head of Commodity Strategy

European gas prices have continued the rally that kicked off after the coldest winter since 2012 helped deplete storage sites across the region. Since then, rising prices of coal and carbon allowances have supported a continued rally as it incentivises utilities to burn more natural gas, which requires half the allowances of coal.

In addition we have just witnessed an unusually hot summer which has led to coal power production being negatively impacted by low river levels across Europe. These developments have translated into bullish power prices. 

Above-average temperatures into August have continued to support the price of natural gas. In the UK, the front season contract has reached the highest level seen since 2008 while Dutch gas, calendar 2019, trades around €22/MWh, an increase of more than 10% during the past two months alone.

Enlarge
Dutch Gas CFD in EUR/MWh, Calendar '19 (source: Saxo Bank)

After languishing between €4 and €8/ton from 2013 to 2017, European carbon allowances have witnessed a strong revival this year with the current price at €18/ton reflecting a year-to-date gain of 120%. 

An important reason for this bull run is the Market Stability Reserve, a long-term solution which will address the current surplus of allowances and improve the system’s resilience to major shocks by adjusting the supply of allowances to be auctioned. The 900 million allowances that were back-loaded in 2014-2016 will be transferred to the reserve and then auctioned in 2019-2020.

Enlarge
European carbon allowances climb above €18/ton, a 10-year high (source: Saxo Bank)

Another key driver for European gas prices is the level of gas held in storage facilities around Europe. According to Gas Infrastructure Europe, storage levels have only just returned to their five-year average following a dramatic draw during the cold winter which this year extended well into March.

Enlarge

In summary the following are some of key drivers behind the price of European natural gas:

The price developments in coal, carbon emissions, and crude oil
Power generation from alternative sources such as wind and solar
Seasonal temperatures above/below the seasonal norm

Saxo Bank offers access to the Dutch and German power market as well the TTF gas markets through CFDs. Monthly, quarterly, seasonal (TTF only),  and annual contracts are available on the SaxoTraderGO platform.

More information: nederland@saxobank.com

Enlarge
Source: Saxo Bank

You can access both of our platforms from a single Saxo account.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)