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The EU’s Eur180/MWh gas price cap would not impact Asian LNG trade flow in the near term but could tighten supplies to Europe in 2023 as some Asian suppliers might opt to sell to other markets, market sources told S&P Global Commodity Insights Dec. 20.
The EU’s energy ministers agreed Dec. 19 to implement a new gas market correction mechanism that imposes a TTF price ceiling of Eur180/MWh for a year from Feb. 15, 2023.
The correction mechanism will be automatically activated if the market sees two conditions met — the TTF month-ahead price exceeds Eur180/MWh for three working days and is Eur35/MWh higher than the reference price for LNG in global markets for the same three working days.
“In theory, this situation should have been averted by such measures as [gas] demand reduction,” said Hiroshi Hashimoto, senior analyst and head of gas group at the Institute of Energy Economics, Japan. “We will need to scrutinize how the introduction of [the price cap] would impact the global market should it be triggered and [if it is] not.”
Analysts said that the cap of Eur180/MWh equates to about $55/MMBtu. Platts JKM for February was assessed at $33.297/MMBtu Dec. 20.
While the bulk of Asia’s LNG spot trade was either concluded on a flat price basis or linked to an LNG benchmark like the JKM, most buy tenders issued by Asian utilities have not included a linkage to European gas prices since early this year.
“[The correction mechanism] could discourage suppliers from selling on a TTF basis, especially if the LNG price premium comes back in a big way,” a Singapore-based trader said.
Impact on refill
An analysis by S&P Global of front-month TTF London close versus the average of Platts JKM and Northwest Europe LNG price assessments shows that about 14% of pricing 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 Sept. 27, when Europe intensified efforts to fill its gas storage capacity by targeted date in November.
The EU gas price cap might not have an impact on the bloc’s current winter demand but could impact its procurements to fill inventories for the 2023-24 winter, an Asia-based market source said.
Platts assessed the benchmark Dutch TTF month-ahead price at an all-time high of Eur319.98/MWh on Aug. 26 as European countries scrambled to fill their gas storage sites and Russian gas flows were further restricted.
Prices have weakened since on the back of healthy storage and demand curtailments but remain historically high, with Platts assessing the TTF month-ahead price at Eur107/MWh Dec. 19.
Among Asian LNG suppliers that actively sold LNG cargoes to Europe this year, some Chinese importers may opt to sell their LNG, which was originally planned to be sold to Europe, locally or to other markets next year should the global LNG price rise above the EU gas price cap, a Chinese market source said.
“The price cap in the European market might benefit Asian end-users as some of the suppliers might want to redirect their cargoes to Asia instead, which will in turn raise the LNG price in Europe again,” a second Asian market source said, adding that cargoes diverted to Asia could still track European market momentum.
Shifting OTC
EU member countries have agreed that the price cap mechanism will apply to month-ahead, three months-ahead and a year-ahead derivative contracts.
Asian market sources said that they do not expect to see a major impact on LNG trade flow in the near term but could see a shift in focus to the over the counter market as the EU price cap is primarily designed for the derivatives market.
“The cap is set at levels high enough to not drastically change the flow of LNG, at least in Asia,” said Johan Utama, principal analyst on the Southeast Asia Gas and LNG team at S&P Global.
“The current level of spot prices above $30/MMBtu is already attracting supply to Europe and it is slowing the LNG demand growth, especially among price-sensitive markets in South and Southeast Asia.”
LNG suppliers in Asia will continue to look for opportunities to trade uncontracted volumes into the spot market, either into Asia or into Europe depending on the market conditions, Utama added.
With an expected shift in focus to the OTC market, an Asian LNG producer said that “the price cap could affect the OTC market,” adding that “it will make exchanges illiquid and more transparent and we could see large gaps in pricing [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 that are actively traded on the OTC market.
