Controversial Gas Cap May Lead to EU LNG Reduction | OilPrice.com

After months of negotiations, the European Union finally agreed on Monday to set a cap on the price of natural gas to protect consumers from excessive price hikes and limit inflationary pressures and industrial damage to European economies. Analysts say the price cap could limit Europe’s ability to continue to attract most of the world’s spot LNG supplies.

Some EU member states, such as Germany and the Netherlands, had reservations about capping prices, fearing that market intervention and capping would take away Europe’s main advantage in attracting LNG supplies this year – higher prices than in Asia. .

Germany agreed to subsidize the price cap only after the EU also agreed to speed up rules for allowing renewable energy projects, according to EU officials.

Temporary price cap effective February 15th

Energy Ministers of the European Union They reached a political agreement On a regulation defining the so-called “market correction mechanism,” which will come into force on February 15, 2023.

The market correction mechanism will be triggered if the next month’s rate in the Transfer of Transfer Facility (TTF), which is the main standard in Europe, exceeds $191 (€180) per megawatt-hour for three working days, and the box rate a month ago is $37 (€35) €. ) is higher than the reference price for LNG in the global markets for the same three business days.

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On Monday, the January TTF contract was trading at around $116 (€110) per MWh.

However, in the event of risks to the security of supply, the European Commission will suspend the price cap rule, as agreed by the European Union.

“Today’s agreement clearly indicates that Europe is not ready to pay any price for gas and is able to work together to ensure energy security,” said EU Energy Commissioner Kadri Simson. He said.

Registration of LNG imports in the European Union

The biggest concern for some EU member states has been that price caps and similar market interventions will make the gas market less transparent and could deprive Europe of the LNG supplies that have been flowing so easily into the EU so far this year.

The EU’s incentive to wean itself off dependence on Russian gas and replace volumes that Russia is no longer providing has made Europe the preferred destination for LNG shipments with flexible contracts, especially those from the United States. More than 70% of all US LNG exports have gone to Europe in recent months, and America is sending record amounts to the EU.

Between January and November, LNG imports into the EU and UK combined jumped 65% year-on-year, according to estimates from the Oxford Institute for Energy Studies (OIES). Imports from the United States alone increased by 176%, while imports from other sources grew by 27%. In the same period, global LNG exports grew by just 5.5%, with nearly half of the growth coming from the United States, according to OIES.

“The key point here is that European LNG imports grew faster than global LNG supply, and in particular, European LNG imports from the US grew faster than total US LNG exports,” the OIES researchers note in their report. Quarterly for gas this month.

Europe’s ability to attract the most LNG supplies so far this year has been helped by higher European prices, lower LNG demand in Asia, including China, and lower LNG imports in Brazil, where hydropower has performed better than expected. , according to OIES.

China has seen Unprecedented recession In its LNG imports this year, Chinese buyers have largely shied away from spot buying as pre-winter stocks were ample, and demand was weak amid sudden Covid shutdowns that slowed industrial demand and economic growth.

Lower Chinese demand and exorbitant prices for other Asian buyers such as Pakistan or Bangladesh created a tailwind for LNG purchases in Europe.

The LNG market is set to tighten next year

However, in recent weeks, demand in Asia has begun to grow, China has returned to the LNG spot market for the next year, and the easing of Covid restrictions in China is likely to intensify competition in the LNG market between the Atlantic and Pacific basins. .

Analysts say Europe is building floating terminals to import LNG to welcome more shipments next year, but there may simply not be enough LNG supplies to flow into Europe when Asian demand rebounds.

OIES Research Fellows write that “even with an expected rise in LNG supplies by 35 bcm in 2023, Europe is likely to face increased competition for LNG supplies from Asian markets, particularly China, and any natural gas supply issues.” It will exacerbate the situation.”

Industry sources said spot LNG prices in Asia for February delivery rose last week by 1% to $38 per million British thermal units (MMBtu). Reuters. Chinese giant CNOOC has reportedly bought four to six LNG cargoes for delivery next year, in one of the largest spot purchases this year.

Amid signs of rising demand from Asia, the EU’s gas price cap may bring more risks than benefits. On Monday, the European Union said the cap would be suspended if the risks outweigh the benefits.

Excluding next-day and one-day contracts from the mechanism would make it possible for European companies to buy the gas they need in the short term, but would leave consumers exposed to higher prices. He said Jacob Mandel, senior associate for global energy markets at Aurora Energy Research.

And it could prevent importers from getting gas they need to buy in advance, such as the LNG shipments that have kept Europe well supplied so far this winter.

By Tsvetana Paraskova for Oilprice.com

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