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Gas market – Gas price follows carbon down 

The gas price was not unmoved by the sharp drop in the carbon price seen on the European energy markets last week. 

We mentioned in last week’s commentary that a drop or correction in carbon could affect the gas market. This is exactly what happened. The gas price fell last week, despite price increases for both oil and coal. The correction in the carbon price began on Tuesday, and it ended the week at around EUR 20/tonne, down more than EUR 3/tonne for the week.

The gas price has been affected by changes in the carbon price for a long time, and due to the possibility of fuel switching in the power sector, there is also a fundamental explanation for this link. There may be periods where the gas market appears to focus more, or less, on this input. There is no doubt that the fall in carbon last week pushed gas to the down side, despite bullish inputs from coal and oil (and the US dollar).

While it ended up declining across the board, the gas market showed significant intraday and inter-day volatility. The front month contract ended the week down only about EUR 1/MWh, but it was EUR 1/MWh higher on Monday and down by EUR 2.5/MWh during the week, so it fluctuated by more than EUR 3/MWh (~ DKK 0.03/m3).

Such large price fluctuations can easily be followed by further large fluctuations until the market stabilises again. We will have to see whether that happens this week, or whether the inputs drive gas to ongoing high volatility. 

Despite the drop in carbon, the gas market is still struggling with low levels in the storage facilities and low LNG deliveries. All things being equal, this increases the risk for the coming winter if cold weather eventuates. The downside for the gas price will therefore most likely be limited as long as winter is approaching.

Bullish mood: The market focuses on factors that can make the price go up.

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