Earlier this week, the European Commission issued a statement declaring what he called a “safety price ceiling” for gas prices set at 275 euros, or $283, per megawatt-hour.
Hailed as the long-awaited gas price cap that EU members have been discussing for weeks, the cap target will, according to the Commission, be used as a “well-targeted and temporary instrument to automatically intervene in gas markets in case of extreme increases in the price of gasoline”.
While national governments may be happy with this new instrument, market players are the opposite of happy. Indeed, traders have warned that use of the instrument could cause irreversible damage to energy markets in Europe.
“Even a brief intervention would have serious, unintended and irreversible consequences by damaging market confidence that the value of gas is known and transparent,” the European Federation of Energy Traders said this week, following the news released by the European Commission, as aforementioned by the Financial Times. What traders and exchanges argue is that the threat of a gas price cap on the previous month’s gas contracts would tighten the market and make it less transparent. Worse still, according to them, is the EC’s idea of basically tying the benchmark prices of European gas futures to the price of liquefied natural gas on the spot market.
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The link to LNG prices is one of two conditions that must be met for the “safety ceiling” to be automatically activated. As established by the EC, these are, firstly, when “the settlement price of TTF derivatives of the previous month exceeds €275 for two weeks” and, secondly, when “TTF prices are €58 higher than the LNG reference price for 10 consecutive trading days”. within two weeks.”
As soon as both happen, regulators will spring into action and, after one day of notifications to all relevant authorities, the ceiling will come into effect and orders from previous months for gas reference prices above €275 will not will be accepted.
According to the Commission, the fact that the cap price is limited to contracts from previous months ensures the stability of the financial system and futures markets by allowing traders to trade gas on the spot and over-the-counter market.
According to traders and stock traders, this is not the case. According to the FT report on the subject, the industry is concerned about unexpected and excessively high margin calls in the over-the-counter market, as well as the ability of exchanges to address defaults.
The LNG loop is of particular concern because, according to traders, the LNG markets are much less liquid and volatile than the TTF market, which is based on actual transactions.
The trading world is so concerned about the gas price cap that the European Federation of Energy Traders warned the Commission this week that the cap could force exchanges to suspend trading if they “cannot meet obligations to operate fair and orderly markets”.
Meanwhile, the European Central Bank has also warned against moving trading from exchanges to the over-the-counter market, which, featuring direct transactions between parties, is much more opaque and much less regulated than the stock market.
Traders are not alone in their concerns, which also include concern that the proposed limit mechanism has not been tested for failure. The Commission has just said that it would enter into force next January.
“It is unrealistic to assume this [ensuring the cap won’t put markets in jeopardy] it can be achieved in a short period of time and certainly not before the end of this winter,” said the director of the European association of energy exchanges, Christian Baer.
Some European diplomats appear to share these concerns, according to the FT. An unidentified member of the diplomatic corps said this week that “safeguard controls only apply ex-post [so] How can safeguards compliance be ensured when the measure is in force? It’s similar to installing airbags after you hit your car in an accident.”
According to the Commission proposal, there are two ways to ensure that the cap does not harm markets: one, by deactivating it or preventing its activation “in the event that the relevant authorities, including the ECB, warn of the materialization of such risks.”
The language of the price cap statement is quite general, as the language of all such statements tends to be. There is little specificity or, indeed, examples of the risks mentioned above that would trigger the cap to be disabled, facts that certainly intensify the concerns of traders.
There is also another concern that may be potentially bigger, and it has nothing to do with the commercial and financial markets. Several EU members are concerned that the price cap will encourage more demand for gas at a time when demand needs to be reduced.
The Commission has an answer to that: activate the mandatory energy saving mechanism agreed at the beginning of this year and launched in its voluntary version a couple of months ago. Whether this would be enough, and more importantly, whether it wouldn’t have some serious unintended consequences remains an open question for now.
By Irina Slav for Oilprice.com
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