EU Members Agree on Natural Gas Price Cap in Bid to Temper Market Volatility

European Union (EU) members agreed Monday to create a price control mechanism for natural gas traded in the bloc after months of negotiation and debate on whether a policy to protect against market volatility could limit much needed LNG supply. The majority of leadership from the 27-country EU agreed to institute what Czech Industry and Trade Minister Jozef SÍkela called a “dynamic” price cap that could be triggered as soon as Feb. 15. Adoption and clarifications for the policy are expected to be finalized in the coming days, according to the EU energy ministry. Under the agreed mechanism, a cap on gas prices would be triggered by two events. The first would be the month-ahead price for the Dutch Title Transfer Facility contract reaching above 180 euros/MWh, around $56/MMBtu, for three business days. The second condition is triggered if the month-ahead price is 35 euros/MWh, or around $11/MMBtu, above a reference price for liquefied natural gas on global markets for three business days.

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“At this point I would like to underline that this proposal was never purely about the cap level,” SÍkela said at a Monday press conference. “It was also about making sure the mechanism wouldn’t jeopardize the security of supply or stability of financial markets.” The policy also includes emergency clauses to suspend a price cap if it negatively impacts Europe’s supply situation, including dropping the volume of traded contracts. The TTF is Europe’s leading gas benchmark. The contract produces a daily settlement price based on transactions of customers physically buying and selling natural gas. It is the world’s second most liquid natural gas contract after the US-based Henry Hub. The prompt TTF closed at near $34/MMBtu Monday, down roughly 6% from Friday’s close as the meeting gave the market pause and a cold snap eased. European gas prices have been dropping since the beginning of last week toward the lowest point in a month as traders anticipate milder weather, according to trading firm EnergiDanmark. The EU has been negotiating different iterations of proposals since late November as members weigh the benefits of preventing record high spikes for imported gas with the risk of destabilizing gas markets and threatening the bloc’s ability to keep attracting LNG cargoes. Other members, such as Poland, have said a mechanism is necessary to reduce Russia’s ability to stoke market volatility by holding pipeline gas to western European countries. “At the recent meetings in Brussels, our majority coalition managed to break the resistance – mainly from Germany,” Poland’s Prime Minister Mateusz Morawiecki wrote on Twitter. “This means the end of market manipulation by Russia and its company Gazprom.” Major international gas market firms and financial institutions, including Intercontinental Exchange Inc. (ICE), have warned potential market instability could force it to reconsider the future of its substantial Netherlands market. ICE has grown to become a preferred stock for the global gas trade and the TTF is traded on the exchange. In a statement released shortly after the EU decision, representatives for ICE wrote that “TTF markets will continue to be open for trading as usual” as it conducts a review of the new policies. “We have consistently voiced our concerns about the destabilizing impact a TTF price cap will have on the market and the risks it presents to financial stability,” ICE representatives wrote. “We are reviewing the details of the announced market correction mechanism, its technical feasibility, the impact on financial stability and whether ICE can continue to operate fair and orderly markets for TTF from the Netherlands as per our European regulatory obligations.” Supplemental reviews and analysis of the policy’s possible impacts are expected to be submitted to EU leadership by March. The European Commission is also expected to follow up with a complete review of the price cap by November to determine if it was effective or merits renewal.

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