The relationship between spot and contract gas prices in Europe

Following deregulations in the European gas market, spot trading of natural gas has been established in the UK, Belgium and the Netherlands, while long-term contracts remain the dominant pricing process in continental Europe. In this paper we investigate the degree of market integration between the three spot markets, the contract gas price in Germany and the oil price. The results indicate a highly integrated market, and there is no evidence of an independent price determination process for natural gas.

► Adding more trading hubs to the European gas market increases spot trading, but does not segment the market. ► Contract gas prices form a stable relationship with spot prices. ► The crude oil price is the most important determinant of gas prices in Europe. ► There is no evidence of independent gas-on-gas competition following deregulation.