The Handbook of Commodity Investing

CHAPTER 36

The Natural Gas Market in the United Kingdom

Chris Harris, Ph.D.

Head of Industry, Networks and Agreements

RWE npower

This chapter describes the natural gas market in the United Kingdom from the perspective of gaining an understanding of the drivers of the principal traded commodity, which is physical and financial gas at the national balancing point (NBP). We pay particular attention to the relationship between the fundamentals of production, transportation and consumption, and the market and institutional arrangements. We find that while gas consumption has high weather sensitivity and potentially high elasticity, prevailing arrangements greatly reduce this elasticity, with a consequential elevation of price volatility. Efforts to improve demand side management are likely to change the demand fundamentals, and the related industry changes may increase the basis risk at the NBP. We also examine the high level relationships between gas and other commodities such as coal, oil, and carbon dioxide. These relationships are accessible in economic terms, but econometric analysis is challenging, as the relationships are periodic and variable as well as complex.

BASICS

To understand the movement of prices, we need to understand the basics of physical operations, the market mechanisms, and the elements of supply and demand. We do this here.

Physical

Production Natural gas is mainly methane with some higher hydrocarbons. It is formed through anaerobic decay of organic matter. ...