How immune is the connectedness of European natural gas markets to exceptional shocks?

Numerous studies underline strong ties between European natural gas markets but they do not account for the Russian invasion of Ukraine, a true test for market integration causing serious disruptions in natural gas supply and triggering elevated uncertainty. In this article we describe how the joint dynamics of natural gas prices quoted at four major European hubs evolved during the turbulent period of 2021–2022. We present various spillover measures applied to the TVP-VAR-SV model to find that the total connectedness declined markedly after the Russian invasion of Ukraine. We show that this drop was almost entirely driven by the price divergence on the UK market, whereas continental hubs remained tightly integrated. Finally, we provide new evidence that price transmission among European markets is driven predominantly by short-term frequencies, with connectedness measures for day- and month-ahead markets sharing common medium-term trends, but different short-term dynamics. These findings grant two policy implications. First, due to pipelines capacity constrains the UK market might decouple from the continental one in turbulent periods. Second, to facilitate full market integration further infrastructure development across Europe is essential.