Is the inevitable energy catastrophe postponed?
Yesterday the European Union introduced a price ceiling on gas. I should point out at once that we are talking not only about Russian gas, but about any “blue fuel” in general. Be it American LNG or Norwegian pipeline gas. However, the terms of this ceiling are so confusing that Brussels may not apply it in practice at all
Source: Bloomberg
The main figure around which the dispute revolved was €180 per 1MWh, which equals $1,900 per thousand cubic metres. However, this is the futures price on the Dutch TTF hub. The EU decision allows for the proviso that the cap may not apply if, within three days, the LNG price on the European continent does not exceed €35 per 1MWh from the TTF quotation.
In addition, the ceiling will not apply to the OTC market. It will come into force on February 15 and will be valid for one year only.
Given the fact that LNG prices in Europe are directly correlated to TTF futures prices, it is reasonable to conclude that in most cases the relevant criteria will not be met.
Indeed, the date of February 15 was not chosen by chance. Usually there are sharp fluctuations in February due to gradual depletion of storage facilities and “unexpected” severe frosts. This was the case in February 2021, for example.
It is not quite clear what the point of the new EU decision is. Nor is it clear how it will work in practice. Previous experience clearly shows that the global LNG market is limited. If it is more profitable for suppliers to sell LNG to Asia, then tankers are turning around right along the way.
Let’s imagine that the relevant ceiling is in place. The TTF price turned out to be much higher than the LNG price. What would happen in this case? Demand for futures would rise sharply on the Asian markets. And it will pull down the price of LNG. Accordingly, tankers will go there, leaving Europe without physical volumes of gas. Yes, Brussels has the right to repeal the cap and will surely buy the problem in the long run. However, in the moment another fluctuation and destabilisation is assured.
In general, I do not know how and why the EU made this senseless decision. The problem is not the quotations. The problem is in the monetary policy of ECB.
After all, there is a reason why commodities on the European continent are rising. In order to avoid the effects of the crisis in 2020 the ECB unleashed the printing press at an unprecedented speed by buying up resources currently available in the world and being prepared to pay increased prices for them. All this is combined with a green agenda and a geopolitical crisis. So we have a combination of factors.
At the moment, the gas prices in the EU continue to be steadily higher than $1,000 per 1,000 cubic metres simply because of the lack of the physical volume of gas (the EU countries are no longer able to buy at the same rate, even by printing money). And when there is a shortage of physical volume, any limitation of prices will only lead to more expensive goods.
However, we should not expect Europe to run out of gas. Yes, there may be problems at the moment, but the EU is likely to survive the winter.
Now, in the 20s of December, the weather is warm. It is 3 to 5 degrees above normal. The strong withdrawal rates from the storage facilities, which were observed a week ago, have exhausted themselves. There is still enough gas: the storage facilities are 84% full. Therefore, the inevitable energy catastrophe is postponed.
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