Storage levels have major impact on actual gas prices

LNG terminal.
LNG terminal. Source: Siim Lõvi /ERR

Gas prices are falling, and EU energy ministers postponed making a decision on the introduction of price caps until next month However, actual prices over the coming months will depend on winter temperatures, as well as the knowledge that next year's stocks will need to be replenished with LNG (Liquified Natural Gas).

In a meeting on Tuesday, EU energy ministers decided to postpone making a firm decision on introduced a cap on gas prices until November.

According to Baltic Energy Partners board member Marko Allikson, the European plans are still in draft form, therefore it is difficult to assess the actual impact of any price caps. However, a cap on LNG import prices could mean leave Europe in a position where it no longer receives enough LNG, which it needs to replenish stocks for the winter.

While gas prices have fallen this week, it is mainly noticeable for spot prices, with no significant reduction in futures prices. "Today's price drop, driven by the warm weather, full gas tanks and the large inflow of LNG, is particularly noticeable when it comes to spot transactions - Europe is ready for winter, but winter has not arrived yet," Allikson said.

Next month's price index for November is likely to be below €140 per megawatt-hour (MWh), almost €60 per MWh lower than in October, with contracts for the new year set to be signed at this rate.

"Actual prices in winter, however, will primarily depend on the weather - a mild winter could push prices down further, while heavy frosts would tend to push prices up," explained Allikson.

"Next year's price levels will stay high due to the awareness that, in 2023 not enough natural gas will arrive from Russia to keep 2022's storage levels at full capacity. That shortfall in particular, will have to be made up by buying even more LNG," Allikson said.

European Commissioner for Energy Kadri Simson (Center), said on Tuesday, that, even though the decision on price caps had been postponed, it would still be necessary to implement emergency measures to prevent gas prices rising as a result of bad news and uncertainty.

However, Allikson believes that imposing a price cap could increase consumption levels, which are currently being kept as low as possible.

The latest EU proposals tend to be more focused on developing a new price index, which would take greater account of the surge in LNG supplies.

According to Allikson, decision-makers need to consider, that price indices tend to develop around liquid markets with large numbers of participants and therefore high credibility.

"You can't say 'everyone use our new index now,' if it's not clearly the best option for the market," said Allikson. " It should also be considered, that the high price level of the much-touted TTF (Title Transfer Facility) index, primarily reflects the fact that there are physical supply constraints and bottlenecks affecting sales in the region. LNG is selling at a lower price than the TTF index in Europe today, and, in purchase contracts, prices can also be freely set below that of the TTF index," Allikson said.

The proportion of gas imported from Russia has fallen below 10 percent, meaning Russian gas no longer has the strong influence it once did on market prices. "Therefore, the new index being planned today by the European Union will probably have function more as a way of aggregating and disclosing information on LNG supplies, however, it may not (end up being) the basis for transactions," he said.

In response to proposals for the possible introduction of a "price corridor" to prevent TTF spot prices climbing too high or falling below certain levels, Allikson said it would be necessary to consider ways to ensure demand can still be met, at times when price caps are in place.

This happens for electricity markets, for example, by using supplies from back-up power plants.

"There is talk of a temporary special mechanism to reduce the volatility of prices on the energy supply markets. Such mechanisms are also used, for example, in the process of trading shares on stock exchanges. Extreme fluctuations in gas prices on the market are mainly related to the liquidity of the major players, for example when there are high margin calls, which cannot be financed. Less volatility would allow companies to better manage liquidity," said Allikson.


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Editor: Michael Cole

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