Stretch ceiling – Newspaper Kommersant No. 217 (7418) dated 11/23/2022

The European Commission, after many months of discussions, outlined the concept of limiting gas prices in the EU. The ceiling is proposed at the level of $3,000 per 1,000 cubic meters, it will only affect the nearest TTF futures contract and will not affect the OTC market. Moreover, the ceiling will not work if LNG prices in the European region are at or above $2,300 per 1,000 cubic meters. Although the European Commission managed to take into account the main claims of numerous critics of the mechanism, there are doubts that, taking into account these reservations and exemptions, the measure will actually help to contain gas prices.

The European Commission presented the concept of a ceiling on gas prices in the EU, which many European politicians proposed to introduce in the summer. The regulator published a brief description of the idea on November 22 and is going to bring it up for discussion by EU leaders at a meeting on November 24.

The idea of ​​a price cap has caused huge divisions within the EU, including between the leaders of the bloc – France (in favor of the ceiling) and Germany (against). The problem is the need to intervene in one of the world’s largest commodity markets with a trading volume of €6 trillion a year and the danger of potential consequences not only for gas companies, but also for banks and financial institutions, including those far outside the EU. Therefore, the European Commission was forced to make significant reservations and reduce the scope of the proposed regulation.

As a result, it is proposed to limit the price of only one product – the nearest futures for a month ahead, traded on the TTF site in the Netherlands, the main European gas hub.

The regulation will not apply to other derivatives, including futures with a different expiration date, and will not affect the spot and over-the-counter markets. The ceiling level is €275 per 1 MWh (about $3,000 per 1,000 cubic meters).

The ceiling will take effect when two conditions are met simultaneously. Firstly, the average price of the nearest futures for TTF within two weeks must exceed $3 thousand. Secondly, the spot gas price for TTF must exceed the average cost of LNG in the European region for ten consecutive trading days within those two weeks. That is, prices for TTF should grow both in futures and on spot, and at the same time should break away from the cost of LNG coming to the continent.

The latter is especially important: if LNG is expensive in the world, then the price ceiling will not work so that LNG tankers do not leave Europe for other, more profitable markets.

In general, the combination of conditions necessary for the launch of the ceiling makes its actual application unlikely.

If a ceiling is introduced, it can be lifted automatically if the difference between the TTF futures price and the LNG price is reduced to less than €58. The European Commission also reserves the possibility of an emergency suspension of the ceiling “in the presence of risks to the security of gas supply, efforts to reduce consumption, ensure gas flows within the EU, as well as financial stability.”

If the EU leaders approve the proposed scheme, it will start working from 1 January.

The price chosen for the ceiling – $3,000 per 1,000 cubic meters – was actually achieved only within six days of August 2022. Now the nearest – December – futures on the TTF index is trading at €124.5 per 1 MWh, having increased by 7.2% over the day.

Thus, the price ceiling is not intended in practice to reduce gas prices in the EU, contrary to the hopes of many of its supporters, such as the Italian and Greek authorities.

The reason for choosing such a high bar is probably that otherwise many market players who hedged their OTC positions with futures could find themselves in a situation where, due to a price ceiling, they could not sell contracts at the planned price. This could lead to both losses and mass non-execution of transactions due to force majeure.

On the other hand, the decision not to regulate the huge OTC gas market at all raises the question in principle about the effectiveness of the ceiling to keep gas prices down. In practice, not only a trader, but also a financial investor will be able to enter the over-the-counter market and sell gas there at any price. At the same time, the uncertainty caused by the ceiling may reduce the liquidity of the nearest TTF futures, which will flow to the OTC market or even to other European hubs. The shrinking liquidity is likely to increase trading volatility, which has already risen sharply this year – a price change of 20% per day is no longer a rarity.

The European Commission, as one of the few economic arguments in favor of the price ceiling, put forward the thesis that the cost of gas at TTF broke away from the global LNG market – according to the regulator, due to speculation. “The fact that the price of TTF is higher is justified as it reflects infrastructure congestion – both from the UK to the EU via pipelines, and LNG receiving terminals in NW Europe,” writes Michael Fulwood of OIES. “This leads to large price discounts. at (UK hub) NBP and LNG versus TTF. The obvious solution is to invest in appropriate infrastructure, limit the price of TTFs, that is, fight the cause of the problem, not the symptoms.”

Yuri Barsukov

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