Supply of LNG will be tight next year, and plans to cap how much EU pays are becoming riskier as China lifts Covid restrictions

"European governments are squabbling over plans to cap natural-gas prices.

In November, Brussels came up with a plan to cap Europe's benchmark Dutch Title Transfer Facility price at 275 euros per megawatt hour, equivalent to about $294. The cap would kick in if prices stay above this level for 10 days. This was considered too high to be effective by some countries, so the cap being discussed at the moment is around 200 euros. After falling in September and October, the TTF price has recently crept up above 130 euros as the weather turns colder.

Limiting how much the bloc will pay seems risky when supplies are so tight. The EU has been racing to boost its capacity to receive gas by sea to replace Russian pipeline flows that were cut in the summer. It should be able to import an extra 40 billion cubic meters of LNG in 2023 by expanding existing gas terminals and leasing floating regasification vessels.

But globally, only around 20 billion cubic meters of new supply are coming on stream next year, according to estimates from the International Energy Agency.

That means competition between Europe and Asia for LNG cargoes could be intense. On Wednesday, the JKM Asian LNG price was roughly $37 per million British thermal units. This is higher than the European NWE at almost $36, according to S&P Global Commodity Insights -- a benchmark that, once the LNG is regasified, feeds into the level of TTF. For now, though, it is still more profitable to send most LNG cargoes to Europe once freight rates are factored in. For example, shipping costs for the shorter trip from the U.S. to Europe are $2.59 per million British thermal units, around half the rate of the journey to Asia.

The easing of Beijing's zero-Covid policy, or a particularly cold winter, could boost Chinese demand for LNG again. This year, China imported around 21 billion cubic meters less LNG than it did in 2021, according to the Oxford Institute for Energy Studies. That was extremely helpful to Europe, which mopped up supplies, but it is unlikely to be repeated next year. In a sign that demand is picking up, China's biggest LNG importer, Cnooc, issued a tender this week to buy cargoes for the first time since the latest sanctions on Russia began.

Meanwhile, Europe is steaming through its stockpile of gas as the temperature drops. Since the region began drawing on its supplies in the middle of last month, levels of gas in storage have fallen from 96% to 87%. And time spent arguing over the price cap means there is less discussion of important changes that would lower demand for gas, such as overhauling the permitting process for renewable-energy projects and improving energy efficiency in European industry and homes.

The premium Europe is paying for gas has added fuel to the region's inflation problem, but so far it has also prevented blackouts and industrial shutdowns. Finding smart ways to cap use, rather than prices, needs to be the policy focus." [1]

1. Europe Can't Afford to Name Gas Price --- Supply of LNG will be tight next year, and plans to cap how much EU pays are becoming riskier as China lifts Covid restrictions
Ryan, Carol.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 16 Dec 2022: B.11.