Gas markets in flux: Analysis of components and influences for natural gas pricing in Europe

In this paper, we compile and analyse the most important determinants of natural gas prices. We provide a short overview of different methods used for studying natural gas prices. Afterwards, we classify the most important determinants for gas prices based on literature. Thereby, we describe the impact of the components on gas prices as well as the strength of the respective influences. On the demand side, we consider economic growth, energy policy and seasonal effects. Regarding the supply side, we focus on infrastructure, domestic resource constraints and LNG growth as well as storage capacity. The discussion of the determinants is embedded in an analysis of the market-structure in Europe, which focuses on the influence of oil-indexed contracts versus gas-on-gas competition. Based on this analysis we propose a framework for classifying the most important determinants based on the temporal effect and strength of impact on natural gas prices. We conclude that in the long-term the extent of oil-price indexation, infrastructure development and volumes of NG reserves constitute the main drivers of natural gas price formation. The potential impact of climate policy remains large but uncertain.