- 14 Jul 2021
- By Gregor Spilker
Usually, the summer months in European natural gas tend to be a calm affair. Price action is subdued, producers run their annual maintenance programs, and gas storage operators replenish their stocks ahead of the dark winter months. This year, however, things are turning out differently.
At the start of the year, Asian importers were caught off guard when a cold winter drove spot prices to record levels. They are now buying record amounts of LNG to avoid a repeat. This has a knock-on effect on European natural gas prices, as Asia and Europe often compete for the same LNG cargoes – notably from the US. At the same time, Gazprom, which is Europe’s largest gas supplier, decided to not book additional capacity to deliver gas to Europe via the Ukraine – despite a number of Gazprom-controlled pipelines undergoing seasonal maintenance. And finally, carbon market bullishness shows no sign of abating, with the benchmark EUA contract rallying to fresh record highs above 55 EUR per ton. These factors have all contributed to TTF prices rising to a 13-year high of above 38 EUR/MWh – which is a sixfold increase from where TTF traded only a year ago in the depths of the pandemic.
Since launching on NYMEX four years ago, TTF futures and options have seen continuous growth in trading activity. In the second quarter of 2021, the average daily volume (ADV) in TTF futures was 3,083 contracts (approximately 2.22 TWh), increasing 60% year-on-year. ADV in TTF options was 1,320 contracts, or 0.95 TWh a day. During this quarter, average open interest across futures and options was 115,000 contracts, the equivalent of 83 TWh. Open interest is a key metric in assessing market activity in a futures market. It tracks the contracts held open at the Exchange at any given time.
Source: CME Group
In response to requests by market participants, CME Group is now introducing a range of new contracts that complement the existing TTF product suite. Launched in July 2021, the four new contracts are cash-settled instruments. Cash settlement, in contrast to physical delivery, means that there is no requirement to have a shipper license in order to make grid nominations at the hub. This enables a wider range of participants to become active. The four new products are:
- TTG, or Dutch TTF Natural Gas Financial Calendar Month futures, is a financially-settled lookalike of the existing physical Dutch TTF Natural Gas Calendar Month futures (TTF). It expires concurrently with the physical contract, pricing against its final settlement price.
- Likewise, TTL, or Dutch TTF Natural Gas Futures-Style Margined Financial Calendar Month option, is the financial equivalent of the Dutch TTF Natural Gas Futures-Style Margined Calendar Month option (TFO). TTL is financially-settled based upon the exercise/assignment price established for the exercise of TFO.
- TTI, the Dutch TTF Natural Gas Financial Day-Ahead/Weekend (ICIS Heren) Calendar Month futures, is settled based upon the monthly average of day-ahead and weekend prices assessed by ICIS Heren, a leading price reporting agency in European energy markets. As the name indicates, day-ahead and weekend prices represent the value for TTF delivery the next day. The contract will give traders a tool to get exposure to TTF spot markets with no physical delivery obligation.
- TTB, the Dutch TTF Natural Gas Financial (USD/MMBtu) (ICIS Heren) M-1 Average Price Calendar Month futures, is settled against the monthly average of a TTF forward month assessment by ICIS Heren. The contract is traded and settled in US dollars per MMBtu, making it a useful product to use alongside other international natural gas contracts such as Henry Hub or the Asian JKM marker.
In addition to the new products, the Exchange recently announced that it will extend the contract listing schedule of TTF physical futures ‒ pending regulatory review. Following the extension, participants will be able to trade up to ten years forward (from five years forward previously). The longer listing schedule will allow participants to better hedge their forward price risk, in particular with respect to long-term pipeline gas or LNG supply contracts.
Global gas markets have certainly kept traders busy this year. First, Asian prices rose to record highs in the first quarter. Now, European gas prices are showing large gains and high volatility. NYMEX trading activity has continued to grow throughout this period of market uncertainty. Responding to market demand, the Exchange is adding a suite of new cash-settled futures and options to its TTF portfolio and extending the listing schedule of its main TTF physical contract.
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