The European gas price cap threatens to exacerbate the energy crisis

Europe’s drive to contain natural gas prices threatens to cut supplies to the region and deepen its energy crisis.

European nations this week reached an agreement on a cap on gas prices, ending a months-long political struggle over whether to intervene in their energy sector. But while the mechanism can help prevent extreme price swings, it can leave the region vulnerable to insufficient supplies and increased competition from Asia.

A price cap without an associated demand cap could exacerbate Europe’s gas supply shortfall by spurring consumption, Goldman Sachs Group Inc. analysts including Samantha Dart said in a report published on Monday. That could limit global supplies next year and, in the worst case, force governments to ration gas.

In addition, the cap will make it more difficult for the region’s importers to significantly increase bids to secure the supply of LNG. The industry has warned that LNG cargoes will favor Asia if prices there are higher than Europe’s caps, just as China’s demand awakens with the easing of Covid-Zero restrictions.

LNG importers in Europe and Asia are competing for supplies from the same exporters as the US and Qatar. One benefit of the cap is that it could reduce the likelihood of runaway bidding wars and spot delivery price spikes between the two regions. Asian LNG prices are closely following moves in Europe, with the two markets becoming closely linked over the past year as importers scramble for replacement supplies.

The European measure, which is due to come into force in February, could be withdrawn if it has “adverse effects”. And the cap doesn’t extend to over-the-counter trading, which can lead to a large shift from exchanges to the less transparent market.

The EU has agreed to cap natural gas prices to €180 per megawatt hour, or about $56 per million British thermal units. For the tool to be triggered, gas prices must be above the cap and to some extent above LNG prices for three days. Had the cap been introduced earlier this year, it would have been used for more than 40 days in August and September.

Asian LNG prices traded above $56 per million BTU for about two weeks between August and September.

The price cap is being celebrated by several Asian LNG importers, who fell victim to the domino effect of rising European prices after Russia invaded Ukraine, according to traders. Spot prices in Asia have fluctuated between $19 and a record $85 this year, forcing several cash-strapped importers to halt plans to source supplies. The European gas price cap threatens to exacerbate the energy crisis

Fry Electronics Team

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