EU’s proposed natural gas price cap will ‘distort’ market signals, Rystad says

The proposal includes a market correction mechanism for the Dutch TTF gas futures, the benchmark European contract

An LNG tanker is guided by tug boats at an LNG export unit in Louisiana, US. Reuters

The European Commission’s proposed price cap on natural gas will “distort” market signals with potential “unintended consequences” for demand and supply, Rystad Energy said in a report on Friday.

The EU plans to propose a cap on natural gas prices after November 24, as part of its efforts to contain an energy crisis resulting from Russia’s military offensive in Ukraine, the EU’s energy policy chief told Reuters on Wednesday.

This proposal includes a market correction mechanism for the Dutch TTF gas futures, the benchmark European contract.

“Any move to limit prices on the headline TTF will distort market signals on the most established gas hub on earth with potential unintended consequences for supply security or demand-reduction measures,” the Norway-based consultancy said.

“Furthermore, such a price cap may prove impossible to implement if trades go off-exchange.”

Natural gas prices in the continent have been volatile over the last week as a disruption at Norway’s Asgard field has reduced supply by 19.8 million cubic meters per day through November 19.

European gas futures, which dropped to a multi-month low of €93.35 per megawatt hour in October, have since gained about 23 per cent.

There is “some associated risk of outage extensions that will pressure Europe’s well-stocked but still vulnerable storage volumes as we approach the last few days of net injections,” said Rystad.

Europe’s gas storage facilities are now more than 95 per cent filled ahead of the winter, but analysts have raised concerns about the continent’s ability to meet demand in 2023 when Russian gas exports are expected to come to a complete halt.

“The risk of disruption to Russian liquefied natural gas imports, for the moment, appears largely shrugged off, but could resurface in 2023,” said Rystad.

Imports of Russian LNG into Europe and the UK rose by nearly 20 per cent between March and October this year compared to the same period in 2021.

European imports of Russian LNG started to accelerate last year as countries faced a shortage of gas. Since the conflict, Europe has also boosted imports from the US and Gulf countries.

“Temperature forecasts, while previously pointing to a mild start to winter, have been steadily revised towards normal or below normal for the coming weeks,” said the consultancy.

The shutdown of Freeport’s LNG export plant in Texas has added to the squeeze on global gas supplies.

“There may be some limited upward price momentum from the delayed restart of the Freeport LNG in Texas, which we expect will get pushed to January from the previously stated mid-November timeframe,” said Rystad.

Freeport LNG, one of the seven export facilities for the commodity in the US, represents about 4 per cent of the global LNG market and its shutdown has curtailed the country's LNG export capacity by about 2 billion cubic feet per day, according to the US Energy Information Administration.

“There has been much speculation about the restart date, with the operator maintaining the mid-November target until recently, which means offtakers that might have been counting on a restart are likely to seek alternative volumes,” said Rystad.