Working Papers

Revisiting Fundamentals of the European Gas Market: The Role of Supply Substitution
Slides Paper SSRN

Abstract

The 2022 European energy crisis exposed the central role of supply substitution in natural gas markets, as disruptions to Russian pipeline flows were met by a sharp surge in liquefied natural gas (LNG) imports. This paper revisits the fundamentals of the European gas market by explicitly distinguishing between pipeline gas and LNG supplies. Using a Bayesian structural vector autoregression identified through sign and elasticity restrictions, the analysis jointly identifies the short-run price elasticities of each supply channel, of consumption and of inventories. The results reveal little heterogeneity between the two supply channels at monthly frequency: both respond weakly to the price, and the flexibility of LNG operates through the reallocation of cargoes over several months rather than through immediate arrivals. What moves the price of gas is the demand for storage, which accounts for close to half of its variance, in calm years as well as in crises. The estimates attribute the 2021–2022 crisis mainly to storage accumulation, layered on a smaller but far more persistent loss of pipeline supply, and show the 2026 Hormuz episode moving with news rather than volumes, the price rising when the strait closed and falling when the missing cargoes failed to arrive. Counterfactual scenarios of the 2022 crisis quantify the stabilising role of demand adjustment, which contained the price about three times as much as LNG did. Supply composition, storage and expectations, rather than total import volumes alone, shape European gas prices.

What Do Fed Funds Futures Price?

Abstract

Fed funds futures price the expected policy path entangled with a risk premium. Since 2022, real-money prediction markets have quoted the physical odds of every FOMC decision daily. Comparing both against non-traded surveys, which cannot price risk, shows that the futures, not the prediction market, are the risk-neutral leg: the gap between them predicts the futures' forecast errors one-for-one while the market's stay unpredictable. A term-structure model combining the three sources delivers the premium daily at every horizon, including those where prediction markets do not quote, and it switches sign across the cycle: negative from six months to a year while the Fed tightened, positive at two years after. On FOMC days, premium repricing is most of the typical move at year-ahead horizons, in no systematic direction: expectation-shock instruments inherit it as noise, not bias.

Work in progress

Nonlinear price dynamics in gas and electricity spot markets (Abstract coming soon!)

New measures of market-based monetary policy surprises in macroeconomic outcomes (Abstract coming soon!)