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Gas Price Cap Could Cause Irreversible Harm To Energy Markets

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Earlier this week, the European Commission statement It declares what it calls a ‘safe price cap’ for gas prices set at €275 or $283 per MWh.

According to the European Commission, the purpose of the cap, hailed as the long-awaited gas price cap that EU member states have been discussing for weeks, is “a temporary and targeted means of automatically intervening in the gas market. Used as a tool: extreme gasoline price hikes.”

Governments may be happy with this new instrument, but market players are not. In fact, traders warn that using this tool could cause irreparable damage to European energy markets.

Following the news released by the European Commission, the European Energy Trade Federation said this week that “even a short-term intervention would have the serious and intended consequences of undermining market confidence that the value of gas is known and transparent.” It will have irreversible consequences,” he said. quoted By Financial Times. Traders and exchanges argue that the threat of gas price caps on month-to-month contracts for gas strains the market and effectively reduces transparency. Worse, they say, is the EC’s idea of ​​essentially tying the benchmark price of European gas futures to the price of liquefied natural gas on the spot market.

Related: Europe’s Gas Crisis Calming: Trafigura

Linking to LNG prices is one of two conditions that must be met for the ‘safe price cap’ to be automatically triggered. As the EC states, these are, firstly, when “the previous month’s TTF derivatives settlement price exceeds €275 in a two-week period” and secondly, when “the TTF price remains above €275 for ten consecutive days.” If the price is 58 euros higher than “. within two weeks. “

As soon as both of these occur, the regulator will take action and, one day after notification to all relevant authorities, the cap will come into effect and previous month orders for gas naming prices above €275 will be voided. accepted.

The fact that the price cap is limited to last-month contracts will ensure stability in the financial system and futures markets by allowing traders to trade gas freely on the counter and spot markets, according to the commission. .

Not according to traders and exchange operators. According to the FT’s report on the topic, the industry is concerned about unexpected and excessively high margin calls in the over-the-counter market and the exchange’s ability to deal with defaults.

LNG ties are of particular concern as the LNG market is far more illiquid and volatile than the TTF market based on actual trading, according to traders.

The trading industry is so concerned about gas price caps that the European Energy Traders Federation this week told the European Commission that it would not be able to meet its obligations to operate a fair and orderly market if it “fails to meet its obligations to operate a fair and orderly market”. He warned that stock exchanges could be forced to suspend trading.

On the other hand, the European Central Bank has also warned against moving trading from exchanges to over-the-counter markets, which are characterized by direct transactions between parties and are much more opaque and far less regulated than exchanges. less than

Traders aren’t the only ones concerned, including concerns about untested flaws in the proposed cap mechanism. The Commission just said it will go into effect in January next year.

“It is unrealistic to assume that [ensuring the cap won’t put markets in jeopardy] It can be achieved within a short time frame and certainly not by the end of this winter,” said Christian Baer, ​​president of the European Energy Exchange Association.

Some European diplomats seem to share these concerns, according to the FT.An unnamed member of the diplomatic service said this week that “safeguard checks apply only ex post facto” [so] If measures are in place, how can you ensure compliance with the safeguards? It’s like installing an airbag after your car has been in an accident. “

According to the European Commission’s proposal, there are two ways to ensure that the cap does not harm the market. One is to disable the cap or prevent it from coming into effect “if the relevant authorities, including the ECB, have warned that such risks materialize.”

The wording of the statements regarding price caps is very general as the wording of all such statements is general. There is little concrete or real-life examples of the above risks that would trigger cap deactivation, which no doubt adds to traders’ concerns.

There is also another concern that is more likely, and it has nothing to do with trading or financial markets. Some EU member states are concerned that price ceilings will encourage increased demand for gas when demand needs to be reduced.

The European Commission has responded to this. It is to start a mandatory energy saving mechanism agreed earlier this year and launched in a voluntary version a few months ago. Whether this is sufficient, and more importantly whether there are significant unintended consequences, is an open question at this time.

By Irina Slav for Oilprice.com

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