European Natural Gas Market Research Articles

Energy shocks in the Euro area: Disentangling the pass-through from oil and gas prices to inflation

We develop a Bayesian Structural VAR model to study the relationship between different energy shocks and inflation dynamics in Europe. Specifically, we model the endogenous transmission from shocks identified by the global market of crude oil and the European natural gas market to two target macroeconomic variables, i.e. inflation expectations and realized headline inflation rate. Our results demonstrate that, since the post-pandemic recovery, inflation in the Euro area is mostly driven by energy price shocks and aggregate supply factors. In particular, the high peaks of the Eurozone inflation are mostly associated with natural gas supply shocks.

Effects of adverse geopolitical risk on price bubbles contagion from European natural gas prices to international energy prices

PurposeThe recent Russia–Ukraine conflict highlights the geopolitical importance of natural gas, especially in Europe. In this light, this study examines the impact of the Russia–Ukraine conflict on the spread of price bubbles from European natural gas to international energy prices.Design/methodology/approachThe Generalized Supremum Augmented Dickey-Fuller (GSADF) test is employed to detect the occurrence of price bubble episodes while the Dynamic Logit Model is used to examine price bubble contagion between the two markets. Further, a tri-variate VAR model is used to examine the determinants of the price bubble.FindingsThe findings reveal multiple bubble episodes in both European natural gas and international energy prices. Further, evidence of bilateral contagion between European natural gas and the international energy market is found. In addition, the Russia–Ukraine conflict triggers price bubble episodes in both markets. Finally, a counterfactual analysis suggests that the conflict increases the bubble contagion from the European natural gas market to the international energy market by about 40%. These findings imply that the Russia–Ukraine conflict is a significant driver of high upside risks to bubble occurrence and subsequent contagion to both European natural gas and international energy prices.Originality/valueTo the best of our knowledge, this study contributes new empirical evidence that the Russian–Ukrainian conflict significantly impacts the spread of price bubbles from the European natural gas market to international energy markets.

Geopolitical shocks and commodity market dynamics: New evidence from the Russia-Ukraine conflict

We investigate the event-based geopolitical shocks from the Russian invasion of Ukraine on agricultural and energy commodities using daily event-based structural vector autoregression (SVAR). We find that the geopolitical shock affects the markets of wheat (2%), corn (1%), and European natural gas (7.5%). However, substantial heterogeneity is observed among the agricultural and energy markets. Geopolitical risk stemming from the Russia-Ukraine conflict affects the European natural gas market more strongly than the US and Asian markets. The regional segment of natural gas markets could explain this. Finally, our analysis explores how geopolitical news affects the dynamics of stock, currency, and bond markets.

Transmission Mechanism and Extreme Time-Varying Spillover Effects between China and International Gas Markets

This study uses the quantile connectedness model to study the transmission mechanism between China and the international natural gas market from August 2017 to February 2024. The time-varying spillover effects under extreme market conditions. The empirical results emphasize the following key points: (a) China mainly acts as an information receiver in the overall market. (b) The spillover effect of the European natural gas market is significantly stronger during the extreme downturn, indicating that the spillover effect is asymmetric. (c) The natural gas futures market plays a central role in market dynamics that affect upward return shocks. (d) System connectivity is highly sensitive to market conditions and increases significantly under extreme market conditions. According to the research results, we should make more efforts to promote the liberalization and marketization of the domestic natural gas market, and strive to improve the bargaining power in the international market to reduce the import premium level. Improve energy efficiency and reduce China ’s dependence on natural gas imports; from the perspective of the global natural gas market, risk contagion between markets should be alleviated under different market conditions and a differentiated risk early warning mechanism should be established.

Dual Sourcing and Resilient Supply Chains: The Case of Essential Resources

The resilience of supply chains is analyzed in a model of strategic technology investments in markets with essential resources. With a monopoly supplier, dual sourcing is a strategy to reduce switching costs in the long-run. It serves as an insurance mechanism against future opportunism by providing access to competitive global markets. Investments in dual sourcing are required to limit abuse of market power by the active source provider, even though the option of dual sourcing may not be exercised in equilibrium. The analysis has implications for the European natural gas market. Liquefied natural gas terminals may serve a strategic purpose of limiting ex-post opportunism even when delivering gas by pipeline is more efficient.

Implications of the European gas market for the long‐term construction of underground gas storage in China

AbstractUnderground gas storage (UGS) is an important part of the natural gas industry. Its peaking characteristics and storage capacity are critical to national energy supply and energy security. Compared with the mature gas market in Europe, the construction of UGSs in China faces many challenges. This study is expected to provide references for China UGS through a detailed analysis and calculations of the European natural gas market and underground storage. First, the current status and development of the European gas market were summarized. And the situation of primary energy structure, gas utilization, and UGSs construction was compared between the EU and China. Second, the working gas volume of UGSs in Europe was analyzed from the perspective of its relationship with total consumption and peak‐shaving volume. Finally, the simulation and prediction of the working curve of the energy storage facilities and the reasonable ratio of the energy storage to load were solved by the numerical fitting method. Meanwhile, the recommendations for China's natural gas market and UGSs were provided. It is appropriate to set the planning target of China UGS capacity to load at 5% of total consumption and the actual peaking gas volume will be 14.4 billion cubic meters by 2030.

Which risks drive European natural gas bubbles? Novel evidence from geopolitics and climate

Ensuring the natural gas market's sound and ordered progress is crucial to Europe's sustainable development. This investigation employs the Generalized Supremum Augmented Dickey-Fuller (GSADF) approach to explore whether there are multiple bubbles in the European natural gas market. Also, we further investigate the influencing factors that contributed to these boom and bust episodes. The empirical results suggest that the multiple European natural gas bubbles are mostly accompanied by abnormal fluctuations, which is consistent with the asset pricing model. In addition, geopolitical and climate factors could increase the possibility of European natural gas bubbles, where the “cold winter” caused by the La Nina event brings more impetus to these bubbles than the “warm winter” due to the El Nino phenomenon, and Russia's geopolitical conflict with Ukraine is more likely to cause bubbles. Besides, the international oil market and European economic situation also exert positive effects on such explosive behaviours. Against the backdrop of an increasingly serious energy crisis in Europe, the above conclusions provide valuable implications to promote European sustainable development by reducing over-dependence on Russian energy and preventing dramatic surges in natural gas demand.

Theory of storage implications in the European natural gas market

The theory of storage stands that futures prices should be equal to the spot price plus the interest forgone in storing the commodity and the warehousing costs minus the convenience yield on the inventory. In this paper, we test several implications of the theory of storage on the pricing of United Kingdom natural gas futures. We obtain partial evidence for the theory of storage as a complete explanation of the pricing of this futures contract. Explicitly, (i) we obtain evidence to explain convenience yield seasonality with spot price volatility, unexpected demand shocks when supply is tight, inventory variations, and trading activity in the futures markets; (ii) we obtain indirect evidence for the theory of storage in accepting the Samuelson hypothesis; (iii) weak although significant influence of storage levels in determining the basis is obtained; (iv) we find weak evidence for the inventory influence of futures volatility; and (v) finally, the slope of the convenience yield structure is found to respond to inventory changes and trading activity in the futures markets that anticipates inventory scarcity. All in all, we can conclude that our evidence for the theory of storage in this market is strong but cannot completely explain futures pricing for natural gas.

How Immune is the Connectedness of European Natural Gas Markets to Exceptional Shocks?

How Immune is the Connectedness of European Natural Gas Markets to Exceptional Shocks?

Перестройка газового рынка Европы: интересы стран-импортеров и компаний-экспортеров

The article focuses on the process of restructuring the natural gas market in Europe. It is shown that the transformation of the European gas market is taking place under the decisive influence of the political decision of the European Commission and the governments of the EU largest gas consuming countries, first, to reduce gas consumption as much as possible in the shortest time; second, to replace Russian gas with imports from alternative sources. As both tasks have the highest priority, the EU countries act within the framework of political, not market logic, regardless of significant economic costs. To hedge against very high gas prices EU introduced since 15 February 2023 the market correction mechanism, capping the price of gas from the above. It is also expected the mandatory filling of gas storage facilities to at least 90% of their capacity before the winter season since 2023 would pressure gas prices downwards. Natural gas exporting companies operate within a system of market coordinates and are ready to participate in the process of transforming the European natural gas market only to the extent that does not contradict their economic interests. The politicization of gas cooperation between the EU and the US at the interstate level cannot change the market behavior of companies. Given the uncertainty regarding the perspective demand for gas in Europe, gas exporting companies are interested in concluding long-term contracts for the export-import of gas on a “take or pay” basis. Europe’s unwillingness to massively engage into the long-term import-export contracts for LNG and readiness to bear additional costs in the form of elevated gas prices will allow companies in the short-term period to make high profits on the spot market.

Price bubbles in the European natural gas market between 2011 and 2020

This study examines the price bubbles in the European natural gas markets. We analyze whether the countries that are located in the same geographical region and using the same pricing methodology may expose quite different numbers of natural gas price bubbles. We apply the methodology known as the generalized sup ADF (GSADF) test by Phillips et al. (2015) using the day ahead data from January 2011 to June 2020. Based on our findings, we show that the Dutch TTF exposes the lowest number of price bubbles, followed by the British NBP, while the Austrian VTP reveals the highest number of price bubbles. Our results show that more established gas markets are subject to fewer price bubbles. Our empirical analysis also provides compelling evidence that the unique characteristics of each hub are important for the number of price bubbles. Furthermore, we confirm that there is a substantial degree of integration in the European natural gas market, as the timing of the bubble periods is quite similar. Identification of a well-functioning natural gas market, which is subject to fewer price bubbles, provides market actors and policymakers with profound information to use in adapting the decarbonized gas market to facilitate sustainable energy transition and expedites the trading of low-carbon gas at the national hubs.

A Cournot Model Applied on the European Natural Gas Market

The existence of several different degrees of restructuring, uneven dynamics, the transition from a natural monopoly to a competitive market with new strategic and economic opportunities are among the defining features of the natural gas market that transform it into an important pillar of the economy.

Nord Stream 2: A prelude to war

To understand the impact of keeping Nord Stream 2 off the map, we model the European natural gas market from the point of view of supply security. Focusing on the network aspects, we propose a novel framework to measure supply security, combining a linear programming approach with a risk assessment technique, expected shortfall (ES) borrowed from finance, particularly suited to measure extreme risk, such as the risk of failing pipelines.Shifting Russian gas exports from Ukraine to Nord Stream 2 increases risks for South-Eastern Europe, and the Trans-Anatolian and Trans-Adriatic Pipelines can only partially alleviate these changes.

Are European natural gas markets connected? A time-varying spillovers analysis

This paper examines the European natural gas market connectedness. Four main markets from the North-Western and South European regions are investigated with the Diebold-Yilmaz connectedness approach derived from the time-varying parameters VAR model with stochastic volatility. We show that the European natural gas market becomes increasingly integrated. Our results update previous findings, which pointed to the leading role of the British NBP as a source of shocks to natural gas price and volatility. Instead, we demonstrate that the two leading markets in Europe are the Dutch TTF and the German NCG. In recent years, however, the observed dominance of the indicated markets weakens, while spillovers from the Italian PSV gain importance. This could indicate the growing role of the supply of liquefied natural gas (LNG) and the launch of the pipeline from the Caspian Sea to Italy.

Adaptive robust optimization for European strategic gas infrastructure planning

The European natural gas market is undergoing fundamental changes that foster uncertainty on both supply and demand sides. This uncertainty has elicited questions about the value of the Projects of Common Interest—strategic infrastructure investments supported by public funding from the European Union. This paper addresses this matter by deploying the adaptive robust optimization framework to consider long-term uncertainties in the gas infrastructure expansion planning problem. This framework confronts the drawbacks of mainstream methods of incorporating uncertainty in gas market models, such as stochastic scenario trees, in which the modeler predefines the probabilities and realization paths of unknown parameters. Our mathematical model endogenously identifies the unfortunate realizations of unknown parameters and suggests the optimal investment strategies to address them. We use this feature to assess which Projects of Common Interest are valuable in maintaining system resilience amid cold-winter demand spikes and supply shortages, while also considering budget constraints. The robust solutions indicate consistent preferences for specific projects. We find that real-world construction efforts have been focused on the most promising projects from a business perspective. However, we also find that the vast majority of projects are unlikely to be realized without financial support, even if they would serve as a hedge against stresses in the European gas system.

Seasonal Flexibility in the European Natural Gas Market

This paper focuses on seasonal demand swings in the European natural gas market. We quantify and compare the role of different flexibility options (domestic production, gas storage, and pipeline and LNG imports) to assess European demand fluctuations in monthly resolution. We contribute to the existing literature on seasonal flexibility by addressing the problem with a mathematical gas market optimization model. Our paper provides valuable empirical insights into the decline of gas production in northwestern Europe. Furthermore, we focus on how specific flexibility features differ between pipeline supplies and LNG supplies and between gas imports and storage dispatch. In terms of methodology, we construct a bottom-up market optimization model and publish the complete source code (which is uncommon for gas market models). Furthermore, we propose a new metric—the scaled coefficient of variation—to quantify the importance of supply sources for seasonal flexibility provision.

Iran and Participation in the European Natural Gas Market: A Network Analysis

Iran and Participation in the European Natural Gas Market: A Network Analysis

Are European Natural Gas Markets Connected? A Time-Varying Spillovers Analysis

Are European Natural Gas Markets Connected? A Time-Varying Spillovers Analysis

Are European Natural Gas Markets Connected? A Time-Varying Spillovers Analysis

Are European Natural Gas Markets Connected? A Time-Varying Spillovers Analysis

Удосконалення економічного механізму природокористування на місцевому рівні в умовах децентралізаційних процесів

It is determined that the economic mechanism of economic management of the nature is a set of methods, means, instruments and forms of budget-tax and financial-credit regulation of economic development and use in the reproduction process of the natural component of national wealth, as well as the implementation of activities aimed at the reproduction of natural resource potential and environmental protection. It is substantiated that in the current socioeconomic and political-legal conditions, the economic mechanism of economic management of the nature operates with an overly narrowed specification of methods and instruments, which makes it impossible to fully ensure a sufficient level of financing for the implementation of environmental projects and priorities for expanded reproduction and enhance of the natural resource potential. It is proved that in the unfavorable conditions of the European natural gas market for the national economy and crisis phenomena caused by the curtailment of business activity due to the spread of the coronavirus pandemic, budgetary opportunities for financing environmental expenditures are limited. Researches have shown that in the dynamics of the real value of environmental expenditures of both the State and local budgets in 2002-2020 in general, there is a downward trend, which indicates a real decrease in the volume of public financing of environmental protection. It is substantiated that due to the deregulation of land relations, that is, the transfer of the State-owned agricultural land outside settlements to communal ownership, additional resource opportunities have been formed to increase the efficiency of the use of instruments of the economic mechanism of economic management of the nature at the local level. It is determined that in the conditions of an overly unified system of budget and tax regulation of economic management of the nature and limited opportunities for financing environmental activities, ensuring a high level of efficiency of functioning of the economic mechanism of economic management of the nature at the local level requires the installation of a complex of incentives into the range of its instruments and methods. Such incentives will orient the entities of agrarian entrepreneurship to the introduction of additional capacities of organic farming, organic cattle breeding and organic feed production. It is substantiated that such incentives are represented by tax and budget preferences.