Europe's Gas-Price Limit Shows Cracks --- Brussels intervention looks pointless and risky

"It didn't take long to find a loophole in Europe's controversial new gas-price cap.

The price limit agreed in Brussels in December came into force on Wednesday and restricts the amount the region will pay for natural gas at 180 euros, equivalent to $192, a megawatt-hour. It triggers if Europe's month-ahead TTF gas price -- the benchmark in the region -- is above this level for three days in a row and is more than 35 euros above a benchmark for liquefied natural gas.

European politicians understandably want to avoid a repeat of the record-high prices seen last summer when the TTF touched 350 euros, closing energy-intensive manufacturing plants and raising bills for consumers.

But it all looks a bit pointless now. European gas prices have fallen and haven't been close to the level of the cap since late September. On Thursday, the TTF price was around 52 euros per MWh. Traders appear nonplussed and are continuing to add futures positions. Open interest in the TTF futures market climbed above one million contracts this week for the first time in four months.

Mild weather has done the heavy lifting for Brussels and gas-storage levels are in good shape. As of Feb. 14, stores were 65% full, double what they were this time last year, according to data from Gas Infrastructure Europe. Low prices suggest the task of refilling the region's facilities again for next winter will be less fraught than last year.

But if a cold snap in March were to burn through stores or demand from China recovers sharply, gas prices could move closer to the level of the cap. The real impact of the ceiling will only be clear then, but there is a possibility that traders start changing their behavior at a level well below 180 euros.

Traders for utilities and energy companies that need to hedge their gas exposure don't want to risk not being able to close their positions if the cap kicks in -- although Europe has set out certain exemptions for this problem. Intercontinental Exchange, which operates the most liquid venue for TTF natural-gas contracts in the Netherlands, thinks trading patterns could shift when prices hit 125 euros. That would factor in a margin for error given TTF's biggest intraday move of 56 euros.

The risk is that the price ceiling pushes activity off tightly regulated venues to more opaque over-the-counter deals. Europe's financial supervisors are watching this trend. Before latest sanctions on Russia, around 15% of natural-gas futures were traded away from the main exchanges but this share has increased to 25% -- possibly because margin requirements have risen on exchanges.

There will be another safety valve as of Feb. 20, when a new parallel market for TTF contracts set up by ICE in London is up and running. Deals done in the British capital won't be capped because the U.K. is no longer in the European Union.

One unintended outcome for Brussels could be that lower liquidity at the main TTF exchange makes gas prices more volatile. The region's new price cap manages to look both risky and pointless at the same time." [1]

1. Europe's Gas-Price Limit Shows Cracks --- Brussels intervention looks pointless and risky
Ryan, Carol.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 17 Feb 2023: B.12.