Activity has dampened down in the European gas options market over the last few months in parallel with the underlying physical market. A combination of problems with the Bacton/Zeebrugge interconnector, natural gas storage facilities and the Shearwater North Sea gas condensate field has severely impacted derivatists' appetite for risk. As one market insider explains: "The market is extremely nervous. Some of the interconnector pipelines were cleaned out recently on the UK side and the filters got clogged up, resulting in poor-quality gas going through to the continent. Although the problem appears to have been solved now, the flow of gas between Bacton and Zeebrugge was reduced while the filters were changed, and people were worried that liquids might get into the pipes and cause huge disruptions like we witnessed last year [see FOW, September 2002]." This has had a significant impact on liquidity, with national balancing point/Zeebrugge basis prices rising from 0.5 pence for pumping periods this time last year to around 4p for July and, because it is a scheduled interconnector maintenance period, 6p for September.
As a result, activity has been concentrated at the front-end of the curve. "This is due to several storage plays coming to market, as people have been unable to inject much gas into storage this month," the market insider adds. "There have been problems with compressors in the rough off-shore fields, which pushed up the price for gas in July and August. So, now people are buying gas for storage for the winter months because they cannot do it now, which in turn has pushed up prices for the third and fourth quarter. Other than this, activity has been pretty static, with no real, long term direction." Consequently, much of the activity witnessed in the options market has arisen from short term covering of positions and gas flows.
Although this lack of market direction is often a seasonal occurrence during the summer months, it has been exacerbated by the closure of Shearwater in March because of gas pressure problems. However, traders report that as soon as Shearwater comes back on line, more gas will be allowed to flow in the system, thereby stimulating trading activity. Since the market has already accounted for September's maintenance period in its dealings going forward, traders expect to see prompt prices decrease from their current highs of around 16p per British thermal unit, regardless of whether the interconnector is back up and running. The market insider concludes: "In the short term, people expect that good weather over the summer will help push prices down a little. In general, prompt prices have surprised market participants - they were much lower last June, so many people went short into summer '03, expecting prices to drop off like last year, but are now having to buy gas back. While the market remains nervous about these off-shore problems and the interconnector, speculative trading will not commence until there is some direction to the market." .