European Gas Prices Climb As The Market Evaluates Cap Laws

Tuesday, as the market digested the implications of the European Union's new wholesale price ceiling, natural gas prices in Europe rebounded after a sluggish start.

After months of wrangling, EU energy ministers agreed late Monday to set a maximum of €180 per megawatt-hour on the Dutch Title Transfer Facility contract, which acts as a baseline for northwest Europe. The cap will go into effect on February 15, 2019 if the TTF trades above that level for three consecutive days and is also more than €35/MWh above similar prices for liquefied natural gas.

The decision will remain in effect for one year.

At 08:10 ET (13:10 GMT), the front-month TTF contract for delivery in January was only 0.7% lower on the day at €107.8, having previously approached €100. However, current prices have declined in recent days as a cold wave in Europe has subsided, and contracts for delivery later next year, which are more impacted by the verdict, have strengthened. The contract for July rose 1.1% to €111.48/MWh.

The move is a calculated bet by the EU that the bloc would still be able to import sufficient gas for the upcoming winter, compensating for any shortage from Russia with pipelines from Norway and North Africa, and meeting the remainder of its demands on the spot market for liquefied natural gas.

This year, global prices traded considerably above that level for weeks at a time, and critics of the move claim that a cap would have prevented Europe from importing when it needed to replenish its strategic reserves the most. Analyst Silvia Merler of the Brussels-based Bruegel think tank warned that if prices rise beyond €180/MWh in 2019, "LNG will go to anyone willing to pay more than €180, resulting in a decline in EU LNG imports."

In addition, she stated that the action could shift trade away from the TTF contract and onto the over-the-counter market, making prices more unpredictable and opaque.

Nonetheless, the EU Commission and a number of member states maintained that the economic damage caused by allowing spot gas prices to soar was larger. The Transmission and Trading Fee has a disproportionate effect on electricity prices because gas-fired power plants typically set the marginal price for power, which then becomes the price that most generators receive, including wind and solar generators whose operating costs are not affected by gas spikes.

"It is difficult to argue that these high prices were necessary to entice supply. Europe can import LNG at significantly reduced prices "Nikos Tsafos, an assistant to Greek Prime Minister Kyriakos Mitsotakis, said via social media on Tuesday. He noted that LNG imports continued to flow into Europe even after the TTF premium relative to LNG prices vanished this year.

In the summer, international LNG prices reached all-time highs due to aggressive purchasing by European consumers. Since then, they have declined, but the Platts Japan/Korea Marker price is still almost six times what it was in the years before Russia curtailed supply to its European customers, underscoring the fact that the structural demand for LNG in Europe has increased dramatically. Currently, the JKM trades for approximately €106.50/MWh.