As the European Union (EU) pushes forward with a proposal to cap gas prices, major energy exchanges warn the decision could pose a serious economic threat to the region.
November 19th letter To members of the European Commission, the European Energy Exchange Association (‘Europex’) has pointed out that gas derivatives are an important tool for producers and consumers to hedge against fluctuations in the spot price of gas. . Gas derivatives, such as the Transfer of Title Facility (TTF) forward month futures contract, could pose “substantial risks to financial stability and security of supply” if they were capped.
If actual gas prices exceed the TTF futures price cap, market participants may move trading to the over-the-counter (OTC) space, potentially resulting in a “significant reduction in transparency.”
The letter cites the European Central Bank’s warning that a shift to the OTC space means “greater risks for counterparties and the financial system.” Furthermore, market participants holding open interest positions are exposed to “unfathomable uncertainty”.
There is also the risk that market participants may decide not to hedge their production or consumption through TTF contracts and try to balance their positions by trading on the spot market.
As far as liquefied natural gas (LNG) is concerned, the EU “must ensure” that it remains competitive to prevent diversion of shipments to other destinations willing to pay “real prices”, the letter said. says.
“Whether hard or soft, caps limit the ability of market participants to open trades at prices they are both willing to accept,” said Tobias Paulun, chief strategy officer at the European Energy Exchange. I’m here. , interview with Bloomberg.
The European Commission will propose a cap on gas prices after the EU energy ministers’ meeting on 24 November, said EU Energy Commissioner Kadri Simon. Reuters.
“We have done our homework. I think this kind of price cap will help calm the market … and also remove the risk of not receiving any shipments at all,” she said. The proposed gas price cap is aimed at curbing the energy crisis facing Europe after Russia’s invasion of Ukraine.
The EU is divided over the proposed price cap. Countries such as Greece, Belgium, Italy and Poland support the move, but countries such as Germany, which is heavily dependent on gas, have expressed concerns.
and Recently According to The National News, independent energy research firm Rystad Energy has warned that if “trading goes off-exchange,” the introduction of a price cap could be impossible.
“A move to cap prices with a headline TTF could distort market signals for the most established gas hub on the planet, with unintended consequences for supply security or demand-cutting measures,” the report said. increase.