Prof. ST Hsieh
Director, US-China Energy Industry Forum
January 25, 2023
The war in Ukraine has passed the 11th month mark. Not only there is no sign of any peace movement, but rather, today, western allies just decided to send heavy duty battle tanks to Ukraine. News from battle ground is not encouraging because a new offensive attack by the Russians is contemplated soon. In the meantime, many regions in Ukraine are without reliable power supply and heating, people are suffering.
Further, G7&EU sanctions against Russia has not been a complete success, see for example: Russian Oil Exports Soaring Despite Cap. Russian crude oil loadings from Baltic ports are set to increase by 50% compared to December to 1.7 million b/d, brushing aside fears of the oil price cap denting production. These sanctions have been implemented hastily because they are the “low hanging fruits” designed to punish Russia with the hope of stopping the war. No good news here!
Now many EU’s new sanctions being considered against Russia now are really intended to booster EU’s energy security. It is selfish but the risks for the global market are significant. Specifically, the EU has moved against the free trade market system. Essentially, the EU is attempting to re-write the global energy market rule for the benefit of the EU. But the entire global energy market is exposed to the risks. The EU should not be allowed to move forward unilaterally.
EU Gas Price Cap Could Trigger Significant Changes In Markets
Mon, January 23, 2023 at 4:00 PM PST
The upcoming price cap on the benchmark European gas contract could abruptly change the gas market and impact the functioning of other markets as well as financial stability, according to the European Securities and Markets Authority (ESMA).
“It could trigger significant and abrupt changes of the broader market environment, which could impact the orderly functioning of markets, and ultimately financial stability,” ESMA was expected to say, according to the opinion seen by Bloomberg ahead of its publication.
After months of negotiations, the EU finally agreed in December to set a price cap on natural gas to protect consumers from excessive price spikes and limit inflationary pressure and industrial damage to European economies.
EU energy ministers reached a political agreement on a regulation that sets a so-called “market correction mechanism,” which would come into force on February 15, 2023.
The market correction mechanism will be triggered if the month-ahead price on the Title Transfer Facility (TTF), Europe’s key benchmark, exceeds $196 (180 euros) per MWh for three working days, and the month-ahead TTF price is $38 (35 euros) higher than a reference price for LNG on global markets for the same three working days.
However, if risks to the security of supply occur, the European Commission will suspend the price cap rule, the EU agreed last month.
“The Commission stands ready to suspend ex ante the activation of the mechanism, if an analysis from ECB, ESMA and ACER shows that the risks outweigh the benefits,” EU Energy Commissioner Kadri Simson said.
Some effects could be seen only after the activation of the gas price cap, and it’s difficult to predict, ESMA says in today’s opinion, according to the draft Bloomberg has seen.
“It is entirely possible that some of the potential effects in the trading and clearing environment might only unfold” after the price cap activation.
Market liquidity could be reduced, says the EU authority, although significant effects could not be identified so far.
In the first assessment on the EU gas price cap rule and the positions limit on the futures contracts in December, ESMA said that “Overall, the position limits set for the spot month and the other months appear to achieve a reasonable balance between the need to prevent market abuse and to ensure an orderly market and orderly settlement, while ensuring that the development of commercial activities in the underlying market and the liquidity of the Dutch TTF Gas commodity contracts are not hampered.”
“ESMA however notes that setting position limits in the uncertain geopolitical environment created by the Russian invasion of Ukraine and Russia’s decision to significantly reduce delivery of natural gas to the EU may prove challenging, especially in relation to the calculation of deliverable supply,” the authority said.
“ESMA also notes that the Dutch TTF Gas contracts may be impacted by the measures that may potentially be taken by the Council and the European Commission regarding the operation of the EU energy spot and derivatives markets.”
The European Union Agency for the Cooperation of Energy Regulators (ACER) said last month that the EU’s price cap on natural gas is an untested tool that may not work as intended to prevent gas price spikes for European households and businesses.
The gas price cap is “a difficult creature. It’s unprecedented, it’s untested,” ACER’s director Christian Zinglersen told the Financial Times in December. Zinglersen also noted that he would be “reluctant to rely on this gas price cap” to protect EU consumers from price spikes.
By Tsvetana Paraskova for Oilprice.com
EU gas price cap risks curbing market liquidity, regulators warn
Mon, January 23, 2023 at 1:24 AM PST
BRUSSELS/AMSTERDAM (Reuters) -The European Union’s gas price cap, which launches next month, could impact financial stability and potentially curb liquidity in Europe’s exchange-traded gas markets, the bloc’s financial and energy market regulators said on Monday.
EU countries agreed in December to a gas price cap that, from Feb. 15, will kick in if benchmark Title Transfer Facility (TTF) gas hub prices spike – a long-debated policy designed to avoid the record-high prices Europe faced last year after Russia slashed gas deliveries.
In a report published on Monday, the European Securities and Markets Authority (ESMA) said that if gas prices edge towards the level that would trigger the cap, market participants are likely to change their behaviour to avoid triggering it, or to prepare for it.
“While this behaviour would appear rational on an individual basis, it could trigger significant and abrupt changes of the broader market environment, which could impact the orderly functioning of markets, and ultimately financial stability,” ESMA said.
ESMA said it appeared likely that market participants would shift to trading gas on contracts or venues where the cap doesn’t apply – either by moving to non-EU trading platforms or trading “over the counter”. That could deal a blow to liquidity on regulated markets for TTF contracts, ESMA said.
A separate report by the EU Agency for the Cooperation of Energy Regulators (ACER) said the impending price cap had so far not caused any fallout in energy markets, but that it was monitoring a range of risks.
ESMA and ACER will both produce a full report by March on the potential impact of the gas price cap.
The policy was approved by EU countries last year after a drawn-out debate between more than 15 pro-cap countries including Poland and Greece, and those such as Germany and the Netherlands that warned of potential negative consequences.
Oilprice.com, January 24, 2023
U.S. Softens Tone on Product Price Cap. U.S. Treasury Secretary Janet Yellen said the Price Cap coalition is working to come up with caps on Russian petroleum products, assumed to kick in on February 5, but the markets “are complicated and there’s a chance things would not go to plan”.