EU gas price cap could restrict LNG supplies in Europe as Asia reassess favorable markets


The EU gas price cap of €180/MWh would not affect Asian LNG trade flow any time soon, but could restrict supplies to Europe in 2023 as some Asian suppliers could choose to sell to other markets, market sources told S&P Global Commodity Insights on December 20.

EU energy ministers agreed on December 19 to implement a new gas market correction mechanism that imposes a maximum TTF price of €180/MWh for one year from February 15, 2023.

The correction mechanism will be activated automatically if the market sees that two conditions are met: the TTF price of the following month exceeds EUR 180/MWh for three business days and it is EUR 35/MWh higher than the LNG reference price in world markets during the same three business days. .

“In theory, this situation should have been avoided with measures such as [gas] demand reduction,” said Hiroshi Hashimoto, senior analyst and head of the gas group at the Japan Institute of Energy Economics. “We will have to analyze how the introduction of [the price cap] would impact the global market if activated and [if it is] not.”

Analysts said the €180/MWh cap equates to about $55/MMBtu. Platts JKM for February was valued at $33,297/MMBtu on December 20.

While most Asian LNG spot trading was concluded on a fixed price basis or tied to an LNG benchmark such as JKM, most purchase offers issued by Asian utilities they have not included a link to European gas prices since the beginning of this year.

“[The correction mechanism] it could deter suppliers from selling on a TTF basis, especially if the LNG price premium returns significantly,” a Singapore-based trader said.

Impact on recharge

An analysis by S&P Global of the previous month’s TTF London close against the average of the Platts JKM and Northwest Europe LNG price assessments shows that around 14% of price days in 2022 would have fallen within the scope of the correction mechanism. .

The vast majority of these include the period from July 26 to September 27, when Europe stepped up efforts to fill its gas storage capacity by the scheduled date in November.

The EU gas price cap might not have an impact on the bloc’s current winter demand, but could affect its purchases to fill inventories for winter 2023-24, an Asia-based market source said.

Platts assessed the Dutch TTF monthly benchmark price at an all-time high of EUR319.98/MWh on August 26, as European countries rushed to fill their gas storage sites and Russian gas flows were further restricted. .

Prices have since weakened due to healthy storage and demand reductions, but remain historically high, with Platts assessing TTF’s price for the coming month at €107/MWh on December 19.

Among the Asian LNG suppliers that have actively sold LNG cargoes to Europe this year, some Chinese importers may choose to sell their LNG, which was originally planned to be sold to Europe, locally or to other markets next year in case the world price of LNG LNG exceeds that of the EU. gas price cap, a Chinese market source said.

“The price cap on the European market could benefit Asian end-users as some of the suppliers might want to redirect their cargoes to Asia, which in turn will increase the LNG price in Europe again,” a second source said. of the Asian market, he added. that cargoes diverted to Asia could still follow the momentum of the European market.

OTC Switch

EU member countries have agreed that the price cap mechanism will apply to derivative contracts one month in advance, three months in advance and one year in advance.

Asian market sources said they do not expect to see a major impact on LNG trade flow any time soon, but could see a shift in focus towards the OTC market as the EU price cap is primarily designed for the derivatives market.

“The cap is set at high enough levels not to drastically change the flow of LNG, at least in Asia,” said Johan Utama, principal analyst for the Southeast Asia LNG and gas team at S&P Global.

“The current spot price level above $30/MMBtu is already drawing supply to Europe and slowing LNG demand growth, especially among price sensitive markets in South and Southeast Asia.”

LNG providers in Asia will continue to look for opportunities to trade uncontracted volumes on the spot market, either in Asia or Europe depending on market conditions, Utama added.

With an expected shift in focus towards the OTC market, one Asian LNG producer said that “the price cap could affect the OTC market,” adding that it “will make trades illiquid and more transparent and we could see large gaps in prices”. [between the OTC and exchange markets].”

Other Asian market sources said that there were means for the OTC market to circumvent the price cap and this could result in an increase in volumes actively traded on the OTC market.
Source: Plates


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