Brexit Could Seal Dutch Dominance Over U.K. Gas Trading Hub

Updated on
  • U.K. vote to leave EU could hurt pound, boosting prices on NBP
  • Recession in U.K., uncertainty may send traders to Dutch hub

If the U.K. votes to leave the European Union next week, it may not bode well for the 28-nation bloc’s oldest natural gas market.

Brexit Watch: The pound, the polls, and the probability of Brexit, all in one place

A so-called ‘Brexit’ would probably cause the pound to plunge to its lowest in 30 years, according to economists surveyed by Bloomberg. That would make gas in the U.K. cheaper and temporarily boost demand and prices, after which uncertainty and a possible recession will send investors scurrying to the euro-denominated gas trading hub in the Netherlands, according to a survey of 10 European gas traders and analysts.

Buying and selling on the Dutch market, the Title Transfer Facility, overtook that on the U.K.’s National Balancing Point for the first time in December, according to exchange and broker data from Trayport Ltd., a London-based trading services provider. TTF is increasingly being used by mainland European traders to manage currency risk. Cheniere Energy Inc. is also linking some of its new U.S. liquefied natural gas contracts to the market.

“NBP is already losing market share to TTF,” said Elchin Mammadov, a utilities analyst at Bloomberg Intelligence. “In that context, Brexit may further put off traders amid uncertainty over future compliance and other regulation.”

Together with contracts linked to oil markets, the U.K.’s natural gas trading hub has been the most important way of pricing and delivering the commodity in Europe since it started about 20 years ago. While the TTF was founded in 2002, it only started to challenge the NBP in terms of volume during the last year.

Cheniere, which in February started LNG exports from the U.S. Gulf Coast, last year signed its first-ever deal with prices linked to the Dutch hub, agreeing to sell as many as 26 LNG cargoes to Electricite de France SA.

In time, the volatility caused by a Brexit would ease, respondents said. A forecast yearlong recession that dampens demand would probably be bearish for gas prices in the U.K. and may be bullish or neutral for the Dutch market as trading shifts to the mainland, according to the majority of those surveyed.

Why the U.K. Is Voting on Whether to Leave the EU: QuickTake

Four polls from three companies put the “Leave” campaign ahead of “Remain” on Tuesday, nine days before the June 23 referendum. The odds of a Brexit are 40 percent, according to a survey of bookmakers compiled by Oddschecker, compared with as low as 20 percent on May 26.

The main gas trading rules, including MiFID II, European Union requirements meant to protect investors that were partially crafted by British authorities, will probably still be applicable in the U.K., said Mammadov. While MiFID II is scheduled to take effect in January 2017, European legislators are seeking to delay its start by one year.

“Structurally there are potentially few actual changes to trading,” said Trevor Sikorski, an analyst at Energy Aspects Ltd. in London. “Although that depends an awful lot on what is negotiated to take its place.”

(An earlier version of this story was corrected to provide the full name of Cheniere Energy Inc.)