With the strongly increased NBP gas prices, gas buyers are considering the potential benefits in managing price exposure having a “Continental style” gas price linked to oil.
Indexation to oil has a number of benefits and provides the opportunity to revise and manage linkages to impact on overall price.
Furthermore, oil indexation opens up for tuning price volatility and related risk exposure by means of individually adjusted variables tuned to a customer's preference. Possible variables are 1/ the oil price reference period, 2/ the validity period for the subsequent gas price and 3/ a possible time lag between the first two.
Oil indexation makes it is possible to stay linked to the energy market over time, but with price volatility reduced to an acceptable level. Thus, the huge volatility that indexing to day ahead prices at NBP causes, can be reduced in the impact to end consumers without having to “lock in” a price going forward.
Buying fixed price gas forward beyond 3 years at NBP is in itself not easy. Liquidity is thin and the financial institutions that act as market makers in this part of the market demand a high premium. It is possible to buy day-ahead products for longer durations but these imply the potentially high volatility.
While many European buyers look with interest at the gas price levels at NBP and the different trading hubs on the Continent, they remain to ask for longer term contracts with oil indexation. They find that provides a good compromise between maintaining the link to the energy markets which are driven by oil anyway on the one hand, and on the other hand, an acceptable risk exposure without the need for intensive and complex day-to-day risk and portfolio management routines.
Where spot price levels may look attractive occasionally, the volatility these bring as shown in the UK does not seem to be everyone’s preference.
WINGAS offers both NBP based contracts and longer term contracts based on oil indexation to UK customers.
Contracts with a possible duration of 10 years and beyond are available.
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