EU Gas Price Cap May Cause Significant Changes in Markets

According to the European Securities and Markets Authority (ESMA), the upcoming price cap on the European gas contract could dramatically change the gas market and affect the functioning of other markets as well as financial stability.

ESMA was expected to announce its assessment of the impact of the gas price cap on markets on Monday.

“This could lead to significant and drastic changes in the wider market environment, which could affect the orderly functioning of markets and ultimately financial stability,” ESMA was expected to say, according to the opinion it saw. Bloomberg before publication.

After months of negotiations, the EU finally agreed in December to set a price limit on natural gas to protect consumers from excessive price increases and limit inflationary pressures and industrial damage to European economies.

EU energy ministers reached a political agreement On the regulation establishing the so-called “market correction mechanism” that will enter into force on February 15, 2023.

The market correction mechanism will be triggered if the pre-month price on Europe’s benchmark Title Transfer Facility (TTF) exceeds USD 196 (€180) per MWh within three business days and the post-month TTF price is USD 38 (35). euro) higher than the reference price for LNG on global markets for the same three business days.

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However, the European Commission will suspend the price cap rule if there are risks to security of supply, the EU agreed last month.

EU energy commissioner Kadri Simson said, “If the analysis by the ECB, ESMA and ACER shows that the risks outweigh the benefits, the Commission is ready to pre-empt the activation of the mechanism.” he said.

According to a project seen by Bloomberg, some effects may only be seen after the gas price cap is activated, and this is difficult to predict, ESMA said in today’s opinion.

“It is entirely possible that some of the potential effects on the trading and clearing environment will emerge only after the activation of the price cap.”

Market liquidity may be reduced, the EU body says, although significant effects cannot yet be determined.

Into first assessment Regarding the EU gas price cap rule and the position limit for futures contracts in December, ESMA said, “In general, the position limits set for the spot month and other months are consistent with the need to prevent market abuse and to ensure an orderly market and orderly settlement, as well as to ensure that the development of commercial activity in the main market and the liquidity of the Dutch TTF Gas commodity contracts are not hindered at the same time.

“However, ESMA notes that in the uncertain geopolitical environment created by Russia’s intervention in Ukraine and Russia’s decision to significantly reduce natural gas supplies to the EU, the determination of position limits may be difficult, particularly in relation to calculating deliverables.” he said.

“ESMA also notes that the Dutch TTF Gas contracts may be affected by measures potentially taken by the Council and the European Commission regarding the functioning of the EU energy spot and derivatives markets.”

The EU’s natural gas price cap is an untested tool, the European Union’s Agency for the Cooperation of Energy Regulators (ACER) said last month. may not work as intended Prevent gas price rises for European households and businesses.

A gas price cap is “a tricky creature. This is unprecedented, untested,” said ACER director Christian Zinglersen. Financial Times in December. Zinglersen also noted that he would “avoid relying on this gas price” to protect EU consumers from price increases.

The benchmark EU gas price on the Dutch TTF traded below $76 (€70) per MWh on Friday, well below the price level at which the cap would be activated. Prices have fallen to levels seen before Russia’s invasion of Ukraine due to mild weather at the start of the year, LNG flows and still-comfortable EU gas storage levels. However, analysts say the market is poised for further volatility in the coming months.

By Tsvetana Paraskova for

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