Spot and forward gas price dynamics in the gas hub market of Western Europe

The past decade new gas hubs emerged in Europe, which are points in a network where gas is exchanged between owners. Market integration of the gas hubs is a EU policy goal. This thesis addresses the cointegrating relationship between prices at the three most liquid hubs. By means of the Johansen test this thesis establishes that cointegration between the longer maturity markets is weaker than in the spot and the month ahead market, which has not been addressed earlier. Previous studies established that a pipeline shutdown may cause decoupling of the spot prices in the markets it connects. By means of an ARMA model this thesis establishes that this is the case for the Interconnector pipeline but not for the BBL pipeline. This thesis adds to the literature by establishing that forward prices at different hubs may also decouple, but less substantially. The decoupling of forward prices does not occur during the shutdown but when the contracts trade that deliver gas during the period of the shutdown. This thesis then addresses the relation between spot and forward prices at the same hub. This thesis finds that the spot market is more reactive to short-term disturbances. Related to this, by means of an error correction model this thesis finds that the forward market leads the price discovery process. This finding implies that market participants could consider using the forward price as benchmark price in newly concluded or revised long-term contracts to capture the most valid price signal.