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Watch: French Virtual Trading Point merger sees limited changes to Winter spreads

On November 1, 2018, the French natural gas market is to merge PEG Nord and TRS Virtual Trading Points, to form a single VTP called PEG with one nationwide gas wholesale price. Currently, PEG Nord is well interconnected, while TRS is frequently at a premium to PEG Nord, because it relies more heavily on LNG arrivals. Despite this, the market is not currently pricing in a wider locational spread for Winter 18 between the merged PEG and the neighboring markets. Yet if supply margins tighten this winter, PEG prices could widen their premium above the European markets to incentivize spot LNG arrivals.

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Welcome to The Snapshot – our series examining the forces shaping and driving global commodities markets today.

On November 1, the French gas market is to merge its virtual gas trading points PEG Nord in the north and TRS in the south, to form a single virtual trading point called PEG within a single trading region, Trading Region France.

Therefore, buyers and sellers will be able to deliver and take gas from the new single balancing point, TRF.

The price difference between the north and south of the country is expected to end as a single national wholesale gas price is established and is expected to make the market more fluid, competitive and less volatile.

Currently, PEG Nord is well supplied through links to the neighboring markets and two LNG terminals.

Meanwhile, TRS is frequently at a premium to PEG Nord, because its only sources of supply are the North-South link and LNG, to attract which TRS prices need to increase.

The North-South link currently has capacity of approximately 40 million cu m/d and will soon be joined by the Gascogne-Midi and Val-de-Saone projects to boost the capacity by further 42%.

However, the extra capacity will not be able to eliminate all bottlenecks, so the TSOs GRTgaz and Terega have developed mechanisms to deal with such occurrences.

Three types of instruments will be used to balance the system when there is too much gas upstream of a limit and not enough downstream.

Interruption of interruptable capacities for entry and exit points with neighboring markets will be used first, followed by locational spreads allowing shippers to buy gas upstream and sell downstream and finally mutual restrictions of firm capacities with neighboring countries if the previous two mechanisms are not sufficient.

The key question concerning the market is whether the price spread between PEG and the neighboring markets is set to widen and we can see from the graph that the market is not currently pricing a wider locational spread for Winter 18 as we approach the merger.

Further, the stress in periods of elevated demand may be partly mitigated this year by strong gas storage inventories in both north and south of the country, with PEG Nord stocks at 6.1 Bcm 30% higher on year and TRS at 4.4 Bcm 7% higher.

Despite this, if supply margins get tighter this winter, PEG prices could widen their premium above the European markets to incentivize spot LNG arrivals.

Until next time on the Snapshot—we'll be keeping an eye on the market.