Natural gas basis swaps increasingly used in over-the-counter market and could eventually trade on exchanges
Basis trading is beginning to emerge around regional hubs in European natural gas and could gain in popularity, predicted European energy exchanges at a conference on October 9.
"You will see basis trading in Europe. Basis trading is already emerging in the [over-the-counter product] complex, but no doubt it will be in the exchange as well," said Bert den Ouden, chief executive of Amsterdam-based energy exchange APX-Endex, speaking at Gastech in London.
Basis trading involves counterparties buying or selling the spread between natural gas at two different physical delivery locations. Basis trades are widely used in the US for offsetting the risk that occurs when participants hedge local gas deliveries with more liquid contracts, such as Henry Hub natural gas futures.
Basis trades have not been as popular in the European market to date, but exchanges say the use of them is growing in the OTC market – and predict basis trading could eventually be brought onto the exchanges themselves.
"Spreads have shown up between some markets in northwestern Europe, [but] it's basis trading with markets that are quite illiquid. There will be some pressure to make them more liquid and it will result in better markets," said Gottfried Steiner, chief executive at Austrian gas exchange Central European Gas Hub.
According to the exchanges, reasons for the shift include the rise of virtual trading points in northwest and central Europe and an increasing volume of liquidity around the Title Transfer Facility (TTF) hub in the Netherlands. That should allow regional gas markets to develop basis trading between regional hubs and the TTF benchmark, they said.
Such a development might improve market liquidity and enable producers and users of physical gas to more closely hedge their underlying risks.
APX-Endex's den Ouden predicted the likely emergence of three global gas price pools in the future – one each for Europe, the US and Asia. As with US market, basis trading would eventually emanate from each of these key benchmarks. However, Europe's market would need to focus on a benchmark contract first and TTF was likely to prove the winner, he suggested.
