Factors of Natural Gas Pricing under Spot Trade Terms on European Markets

This paper studies the factors that affect gas spot prices on European markets. Natural gas market is described as tied to infrastructure, which results in establishment of natural monopolies. However, measures towards liberalization and deregulation of the sector led to a more market-driven trade mechanism, namely spot trade, in contrast to long-term agreements. Spot trade is considered to be more flexible, but prices become volatile. The main factors that influence gas spot price are seasonality, storage levels described in temperature indicator and the price of the closest substitute, namely oil, expressed in long-term gas price formula. Factors of supply are not fully included in the model since supply is price-inelastic in short term. Moreover, gas spot price behavior tends to follow mean-reverting process. The model was estimated on the data from National Balancing Point, the British gas hub, as the longest mature hub in Europe.