Gas is thinner, the ceiling is lower – Newspaper Kommersant No. 236 (7437) of 12/20/2022

The EU countries have agreed on a ceiling on gas prices, which will come into force on February 15, 2023 and will be about €180 per 1 MWh, or $1.9 thousand per 1 thousand cubic meters. The mechanism will work only if the futures on the largest European gas hub TTF within three days not only exceed this level, but also break away from LNG prices by more than €35. Analysts believe that the new mechanism can be applied as early as this winter and carries risks for the EU to leave LNG to Asia.

European countries have approved a market correction mechanism, according to which the price of gas at the most liquid TTF hub in Europe will be limited if it exceeds the level of €180 per 1 MWh ($1.9 thousand per 1 thousand cubic meters). This measure is introduced to prevent sharp fluctuations in gas prices, debates about the appropriateness of its adoption have been carried out by European officials for the past few months. The agreement was reached against the backdrop of a growing energy crisis caused by a reduction in gas supplies from the Russian Federation.

The restriction will come into effect if the futures on the TTF index with an expiration date in the coming year exceeds the level of €180 per 1 MWh for three days. However, the restriction will not work if the difference between the quotation on the hub and the price of LNG in the European Region does not exceed €35 ​​per 1 MWh.

Thus, if LNG prices are high, the price ceiling may never be applied.

It will come into force on February 15 for a period of one year and will not affect the OTC gas market (over the counter).

According to Hungarian Foreign Minister Peter Szijjártó, nine countries, including Hungary, opposed the gas price ceiling, but a qualified majority supported this proposal. Austria and the Netherlands abstained. Germany, the largest gas consumer on the continent, voted for the introduction of the ceiling, which had previously doubted Europe’s ability to attract LNG to the continent in the event of price restrictions.

Last week, the ICE exchange, which manages the TTF hub, warned that if plans to limit gas prices are implemented, it could move its hub outside the EU. The problem is the possible massive margin calls by market participants on forward contracts, which consisted in the calculation of price increases above the level of €180 per 1 MWh.

The European Commission has warned that it is ready to suspend the ceiling in case of disruption of financial markets or a threat to the security of supplies.

The adopted caps are significantly lower than an earlier proposal by the European Commission to cap prices at €275 per MWh (about $3,000 per 1,000 cubic meters). At that time it was proposed that the average price should be held at this level for two weeks, and the spot gas price for TTF should be more than €58 per 1 MWh higher than the average LNG price in the European Region for ten consecutive trading days.

Gazprom declined to comment on whether gas supplies to Europe would continue if prices were capped. However, Decree of the President of the Russian Federation No. 172 (on the transition to paying for gas supplies to “unfriendly” countries in rubles) provides for the possibility of stopping supplies if the consumer does not pay in full. In addition, the price cap violates the terms of Gazprom’s long-term contracts. “This is a violation of the market pricing process, an encroachment on the market process, any references to the ceiling cannot be accepted,” Russian presidential spokesman Dmitry Peskov told Interfax. It will take time, he said, to “thoroughly weigh the pros and cons” in crafting Russia’s response.

“No reaction at all. This is their own business. There is nothing else to do – let them, ”Russian Foreign Minister Sergei Lavrov told reporters.

Sergei Kondratiev of the Institute of Energy and Finance believes that setting a “price cap” for gas at €180 per MWh makes it more likely to be applied in practice. Part of the volumes may go to the over-the-counter market, but the effect will most likely be small – supplies will simply be redirected to Asia. “The problem now is not so much with the price ceiling – the cost of gas in the EU will be determined to a greater extent by demand in Asia, the volumes will go there and the Europeans will not be able to buy LNG at all,” he said.

Ivan Timonin from Vygon Consulting believes that the introduction of a new mechanism will not solve the problem of competition between Europe and Asia for LNG cargoes in a limited market, “and therefore its effect on quotes will be more speculative and short-term.” In his opinion, in 2023, gas quotes will remain in the range of $1.3-1.5 thousand per 1 thousand cubic meters against the backdrop of high occupancy of European storage facilities and favorable weather conditions for importers. Therefore, Mr. Timonin believes, “it cannot be ruled out that the work of the new tool will not be seen in practice.”

He also notes that the price ceiling does not apply to spot quotes, including the day ahead. “When the price ceiling is reached, it is most likely that liquidity from the regulated futures market will move to the unregulated spot market, which, in turn, will lead to an increase in spot prices,” he notes.

Tatyana Dyatel